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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 13, 2000
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-19092
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ROSS SYSTEMS, INC.
INCORPORATED IN DELAWARE IRS EMPLOYER IDENTIFICATION NO. 94-2170198
TWO CONCOURSE PARKWAY, SUITE 800
ATLANTA, GEORGIA 30328
(770) 351-9600
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $0.001 par value; Preferred Shares Purchase Rights
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S VOTING STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT, BASED UPON THE CLOSING SALE PRICE OF THE
COMMON STOCK ON OCTOBER 6, 2000 IN THE OVER-THE-COUNTER MARKET AS REPORTED BY
NASDAQ, WAS APPROXIMATELY $22,700,000. SHARES OF VOTING STOCK HELD BY EACH
OFFICER AND DIRECTOR AND BY EACH PERSON WHO OWNS 5% OR MORE OF THE OUTSTANDING
COMMON STOCK HAVE BEEN EXCLUDED IN THAT SUCH PERSONS MAY BE DEEMED TO BE
AFFILIATES. THIS DETERMINATION OF AFFILIATE STATUS IS NOT NECESSARILY A
CONCLUSIVE DETERMINATION FOR OTHER PURPOSES.
As of September 20, 2000, the Registrant had outstanding 24,434,116 shares
of Common Stock.
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DOCUMENTS INCORPORATED BY REFERENCE
Certain items in Part III of this form 10-K Report are incorporated by
reference to the Registrant's Proxy Statement for the Registrant's 2000 Annual
Meeting of Stockholders to be held November 17, 2000.
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ROSS SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED JUNE 30, 2000
TABLE OF CONTENTS
PAGE NO.
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 7
Item 3. Legal Proceedings........................................... 7
Item 4. Submission of Matters to a Vote of Security Holders......... 7
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 8
Item 6. Selected Financial Data..................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition
and
Results of Operations....................................... 9
Item 7.A. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 18
Item 8. Financial Statements and Supplementary Data................. 19
Item 9. Changes in and Disagreements with Accountants on Accounting
and
Financial Disclosure........................................ 19
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 20
Item 11. Executive Compensation...................................... 21
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 21
Item 13. Certain Relationships and Related Transactions.............. 21
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 22
SIGNATURES............................................................. 23
PART I
ITEM 1. BUSINESS
THIS REPORT ON FORM 10-K (THE "REPORT") CONTAINS FORWARD LOOKING STATEMENTS
REGARDING FUTURE EVENTS WITH RESPECT TO ROSS SYSTEMS, INC. ACTUAL EVENTS OR
RESULTS COULD DIFFER MATERIALLY DUE TO A NUMBER OF FACTORS, INCLUDING THOSE
DESCRIBED HEREIN AND IN DOCUMENTS INCORPORATED HEREIN BY REFERENCE, AND THOSE
FACTORS DESCRIBED UNDER "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS".
GENERAL
The following description of business is qualified in its entirety by, and
should be read in conjunction with the more detailed information and financial
data, including the financial statements and notes thereto, appearing elsewhere
in this Report. Unless otherwise stated in this document, references to (a) the
"Company" or (b) "Ross" shall mean Ross Systems, Inc., a Delaware corporation,
and its subsidiaries.
The Company believes that it is a leading supplier of enterprise-wide
business systems and related services to companies installing internet-enabled
e-business software products, in particular in the process manufacturing
markets. Customers are primarily medium-sized companies (with annual sales of
$50 million to $2 billion) upgrading internal systems to improve profitability
through the availability of timely and accurate information, or to modernize
their management information systems operations in order to reduce costs and
provide business-to-business (B2B) linkage with suppliers and customers. The
Company licenses its products to customers through a direct sales force in North
America and Western Europe as well as independent distributors in 24 other
markets worldwide. Since the Company's inception in 1988, the Company has
licensed software products to an installed base of over 3,400 customers
worldwide.
PRODUCTS
The Company markets a broad range of sophisticated business application
software that addresses B2B electronic commerce including procurement,
collaborative planning, financial, manufacturing, distribution, supply chain
management, and human resource needs of manufacturers primarily in process
manufacturing type industries. In addition, the Company supports a large
installed base of companies, which utilize the Company's financial and human
resource software products exclusively. The Company's software product license
fees are based on the modules licensed, and the number of concurrent users
supported by the hardware on which the modules operate.
GENERAL BUSINESS AND MANUFACTURING PRODUCTS
The Company has developed a series of products designed for the Internet
environment which allow users to access and manipulate data from their personal
computers using a portal for functional personalization of the user's desktop.
These products incorporate an integrated, modular, feature-rich and
user-friendly operating environment. The integration of these products allows
the sharing of data between application products with a common user interface
while integrating frequently visited Web sites and other software tools. The
Company's open systems applications function in a relational database management
system ("RDBMS") environment that provides for a high degree of data
availability and integrity. Additionally, because the Company's iRenaissance
financial, manufacturing and distribution applications were developed with the
GEMBASE fourth generation language ("4GL"), the Company believes they are easily
modified and expanded. GEMBASE is a programming environment that delivers a
central data dictionary, complete screen painting, editing and debugging
capabilities, and links to several popular RDBMSs. GEMBASE itself is written in
the C programming language to facilitate portability across
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multiple hardware and RDBMS platforms. Because the iRenaissance financial,
manufacturing and distribution products were developed in GEMBASE, customers
often find it easy to customize their own applications.
The Company offers a comprehensive Enterprise Resource Planning ("ERP")
solution with functionality specifically tailored to the unique formula and
specifications-based requirements of process manufacturers, including food and
beverage, consumer packaged goods, pharmaceutical and biotechnology, chemical,
primary metals, and pulp and paper companies. The Company believes that this
native functionality is superior to the alternative presented by many of the
Company's competitors, which is to adapt systems designed primarily for the
discrete manufacturing sector. The product may be deployed in a thin client mode
to permit the greatest performance advantage for companies using remote
communications over the internet.
The Company also markets a strategic management tool called Strategic
Application Modeler (SAM) that helps companies define and map their business
processes to industry best practices, which are included in the modeler's
library. The Company believes that this product shortens the implementation time
period of application software systems and allows users to manage those
applications throughout their life cycle.
The Company's iRenaissance Human Resource Series is a comprehensive, human
resource management system including payroll processing. The client component
has a Windows and NT graphical user interface, which includes the customizable
toolbar feature. The host server processing is COBOL based, to efficiently
provide for the heavy batch processing requirements of payroll.
The iRenaissance server applications run on Microsoft's Windows; Compaq
Corporation's ("Compaq") Alpha, UNIX, and Open VMS operating systems;
International Business Machines Corporation's ("IBM") RS/6000; Hewlett-Packard
Company's ("HP") HP-UX; and Fujitsu's DS-90 UNIX. Renaissance CS, the company's
legacy products, currently support multiple RDBMS, including: Oracle Systems
Corporation's Oracle, RDB, and Microsoft's SQL Server.
The Company believes that its client components have the "look and feel" of
Microsoft Windows PC applications, complete with scroll bars, buttons, pop-up
menus, dialog boxes and dynamic data exchange links to popular spreadsheets and
word processors. The iRenaissance architecture enables customers to capitalize
on the power of the PC.
The Company's Renaissance classic line of general business accounting
applications is feature-rich and well-integrated. The Company has continued to
enhance these applications to serve existing customers and has delivered support
for customers that use Oracle's RDBMS. The Company will continue to market the
Renaissance classic products to its installed base of customers, as well as to
accounts that want to operate exclusively in a Compaq/DEC proprietary
environment. To provide a long-term growth path for Renaissance classic
customers, the Company now offers them the ability to easily upgrade to its new
products inexpensively
The Company introduced support for the Microsoft NT operating environment at
the end of fiscal 1997. At the close of fiscal 2000, approximately 70% of all
new product licenses were sold on the Microsoft NT environment. The Company
believes that it continues to match the marketplace in the growth of new
technologies while focusing on maintaining superior functionality.
PRODUCT LINE EXPANSION
In fiscal 2000, the Company formed Resynt, a subsidiary focused on
e-commerce. Resynt's internet applications and services include a wide range of
e-commerce business-to-business (B2B) features and technology to connect
traditional ERP (enterprise resource planning) systems over the internet to
customers and suppliers, thereby tightly linking trading partner supply chains
to achieve sustainable competitive advantage. These applications are designed to
allow companies the ability to leverage the
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technology of the Internet in order to automate business processes and
effectively manage business resources
The Resynt product line is currently comprised of six modules. All of these
applications leverage the domain expertise, vertical industry solutions, and
customer base retained in the Company's core business. These products are
designed to compliment and integrate with the Company's iRenaissance ERP suite
of products. They Resynt product line includes:
1) RESYNT.COMMERCE--This is a comprehensive B2B sell-side e-commerce
application. One of the main features of this product is a customer
self-service kiosk which gives buyers access to key information such as
order and shipping status, billing and payment data, product catalogs,
inventory availability and price information. It allows buyers to place
orders directly over the Internet. Furthermore, the application contains
business rules and proprietary logic that is tuned to the needs of the
specific industries and customers that the Company serves. In addition to
the product's ability to integrate tightly with the iRenaissance ERP
backbone, it can also integrate with other ERP systems so that data and
transactions move seamlessly back and forth between web-based
applications and back-office applications.
2) RESYNT.PROCURE--This is a comprehensive B2B buy-side e-commerce
application. Resynt.procure allows companies to cut costs and improve
productivity across their purchasing functions. This product will enable
customers to use pre-built catalogs, requisitioning, approval, and
workflow capabilities to significantly lower the time involved and cost
of indirect purchasing.
3) RESYNT.CONNECT--This application provides connection with the ERP
backbone transaction system on the back end. This is the common engine
and conduit used to handle all the requisite data transfer and
integration issues. It is built using extensible mark-up language (XML),
an industry data transfer standard technology. It also allows
applications to transact not only with the ERP backbone, but also with
legacy systems.
4) RESYNT.EMPLOYEE--This application provides web-based services to
employees and managers in areas like benefits, human resources, and
travel expense reporting. Tight integration to the back office
applications allow the Company's customers to deploy appropriate
functions onto the web on demand while insuring that data and
transactions are handled once in an integrated fashion.
5) RESYNT.COLLABORATE--This product provides optimization of the
fulfillment process. This application allows manufacturing companies to
collaborate over the web across their supply chain. This covers both
upstream and downstream collaboration so that a Company can handle demand
planning issues like forecasting and vendor managed inventory while also
dealing with factory scheduling and optimization.
6) RESYNT.TRADE--This product provides connections to specific Internet
Trading Communities. It is designed to provide pre-integrated links to
the key trading communities that are especially important to the vertical
industries that the Company serves. This helps reduce planning and
integration work for customers and makes connecting to and dealing with
trading communities a faster and simpler task. The custom nature of
RESYNT.TRADE requires a customer commitment to a specific exchange. The
technology to implement RESYNT.TRADE is inherent in the RESYNT.CONNECT
product which is sold with services as RESYNT.TRADE.
THIRD-PARTY PRODUCTS
The Company resells complementary software products licensed from third
parties, including applications for custom reporting of information maintained
by the Company's programs (Business Objects and FRx), systems management
software, and certain middle-ware products. The Company resells other software
products licensed from third parties (Clarus, Prescient Systems and Preactor)
that are privately labeled. Additionally, the Company has entered into
agreements which enable it to resell RDBMS
3
products and other products that are sublicensed to end users in conjunction
with certain of the Company's open systems products. License revenues from the
products described in this paragraph constitute approximately 18% of total
software product license revenue in fiscal 2000.
SERVICES
The Company's worldwide consulting services operation complements its
e-business and enterprise software sales organizations. The Company offers a
broad selection of services to install and optimize each available software
product. Services provided by the Company fall into two broad categories,
Professional Services and Client Support. In addition, the Company has
established professional service relationships with large international
information systems consulting firms to provide independent service offerings to
customers who may prefer a consulting alternative for their project
implementation.
PROFESSIONAL SERVICES
The Company's Professional Services organization provides business
application experience, technical expertise and product knowledge to complement
the Company's products and to provide solutions to clients' business
requirements. The major types of services provided include the following:
Management Consulting involves in-depth analysis of the client's specific
needs and the preparation of detailed plans that list step-by-step actions and
procedures necessary to achieve a timely and successful implementation of the
Company's software products. These services are generally offered on a time and
expense reimbursement basis.
Technical Consulting involves evaluating and managing the client's needs by
supplying custom Web application systems, custom interfaces, data conversions,
and system conversions. These consultants participate in a wide range of
activities, including requirements definition, and software design, development
and implementation. These consultants also provide advanced technology services
focused on networking, and database administration and tuning. These services
are generally offered on a time and expense reimbursement basis. The Company
also provides remote systems management, remote applications management and a
complete range of remote application systems hosting services to companies that
prefer to outsource their complete information systems infrastructure. The
Integris division of Bull and Exodus, are the Company's partners in providing
this remote hosting service.
Education Services are offered to clients either at the Company's education
facilities or at the client's location, as either standard or customized
classes. These classes are priced at either fixed daily rates or on a per
student basis.
Third party consulting partners have been established to take advantage of
specific industry expertise and to support the implementation demands of the
Company's growing customer base. The Company has developed relationships with
Deloitte & Touche, Andersen Consulting, and PricewaterhouseCoopers to support
client implementation service needs worldwide in key vertical markets, as well
as specialist consulting companies such as Raytheon Systems. The Company
believes that these relationships will help generate new joint business
opportunities.
CLIENT SUPPORT SERVICES
The Company's Client Support functions include web-based support, telephone
support, technical publications and product support guides, which are provided
under the Company's standard maintenance agreements, under which most of the
Company's installed customers are supported. The annual maintenance fee for
these services is based upon a percentage of the current price for the licensed
software. The standard maintenance agreement also entitles clients to certain
new product releases and product enhancements. The Company also offers a premium
support service, which, in exchange for an additional
4
fee, entitles the customer to guaranteed response times and access to the
Company's most senior support personnel.
MARKETING AND SALES
The Company sells its products and services in the US and Western Europe
primarily through its direct sales force. At June 30, 2000, the Company had 102
sales and marketing employees. In other areas of the world, the Company sells
its products through distributors. In support of its sales force and
distributors, the Company conducts comprehensive marketing programs which
include telemarketing, direct mailings, advertising, promotional material,
seminars, trade shows, public relations and on-going customer communication.
The Company is headquartered in Atlanta, Georgia, with sales, service and
support centers in the major U.S. business locations of: Waltham (Boston), Fort
Worth, Costa Mesa (Los Angeles), Teaneck (New Jersey), Redwood City, Alameda
(San Francisco) and Escondido (San Diego). The Company has subsidiaries in
Brussels, Belgium; Toronto, Canada; Paris, France; Berlin, Germany; Utrecht, the
Netherlands; Barcelona and Madrid, Spain; Northampton, United Kingdom as well as
Hong Kong and Singapore.
The Company has distribution arrangements with distributors in the following
countries: Argentina, Australia, Brazil, Chile, Colombia, Czech Republic,
Denmark, Finland, Germany, Greece, Hong Kong, Hungary, Indonesia, Ireland,
Italy, Japan, Jordan, Lebanon, Malaysia, Mexico, Morocco, New Zealand, Norway,
Pakistan, Peru, Poland, Portugal, Rumania, Russia, Saudi Arabia, Singapore,
Slovak Republic, Sweden, Taiwan, Thailand, Uruguay and Venezuela. These
distributors pay the Company royalties on the sales of the Company's products
and maintenance services.
International revenues (from foreign operations and export sales)
represented approximately 32%, 33%, and 31% of the Company's revenues in fiscal
2000, 1999 and 1998, respectively. The Company intends to broaden its presence
in international markets by entering into additional distribution agreements.
PRODUCT DEVELOPMENT, ACQUISITIONS AND ALLIANCES
To meet the increasingly sophisticated needs of its customers and address
potential new markets, the Company continually strives to enhance its existing
product functionality and add new product features. The Company surveys the
needs of its customers annually through ballots and at its user conference and
incorporates many of their recommendations into its products. The Company also
conducts a variety of forms of market research with industry analyst groups and
targeted industries to determine strategies for new features and functions. The
Company is committed to achieving advances in the use of computer systems
technology and to expanding the breadth of its product line.
The Company intends to expand its potential markets by developing new
products which address the needs of additional prospective customers, including
those in key international markets related to both language, currency and local
accounting custom and procedure. In fiscal 1999, the Company introduced EMU
(European Monetary Unit) capabilities to its product lines. In fiscal 2000, the
Company introduced additional capabilities to its product lines for the Japanese
market.
In support of its product line expansion strategy, the Company intends to
acquire products or develop relationships with providers of complementary
software to supplement its existing product offerings. The Company believes that
the acquired software components will extend the functionality and overall value
of the core product line, while third party software components will both
enhance the usability and presentation of the data provided by the system and
provide specialized functional extensions. The Company has agreements with
Seagate Software Corporation, Inc., Clarus Corporation, Preactor International
Limited, Prescient Systems, Inc., FRx Software Corporation, Business
Objects, Inc., SRC Software, Inc., and Optical Technology Group, Inc.
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In 1998, the Company acquired Bizware, Inc. ("Bizware"), a software service
provider specializing in Ross implementation and upgrade conversions. In 1999,
the Company acquired Hipoint Systems Corporation, a Canadian software service
provider. Both acquisitions were primarily non-cash, stock transactions.
COMPETITION
The business applications software market is intensely competitive. The
Company competes with a broad range of applications software companies. The
Company's competitors include the following: general business application
software providers, such as J.D. Edwards, Oracle Corporation, and SAP AG; as
well as business applications software providers in specific vertical markets
that offer products that compete with the Company's process manufacturing
products such as Invensys. In the human resource market, the Company competes
with various business applications software providers, including
PeopleSoft, Inc. Many of the Company's competitors have greater financial and
business resources than the Company and compete aggressively on financial
stability.
The principal competitive factors in the market for business application
software include product reputation, product functionality, performance, quality
of customer support, size of installed base, financial stability, hardware and
software platforms supported, price, and timeliness of installation. The Company
believes it competes effectively with respect to these factors.
PROPRIETARY RIGHTS AND LICENSES
The Company provides its products to end users generally under nonexclusive,
nontransferable licenses, which generally have terms from 20 years to
perpetuity. Under the general terms and conditions of the Company's standard
license agreements, the licensed software may be used solely for internal
operations on designated computers at specific sites. The Company makes source
code available for certain portions of its products.
The Company has registered "RENAISSANCE", "RENAISSANCE CS", "STRATEGIC
APPLICATION MODELER (SAM) and "ROSS SYSTEMS" as trademarks in the United States.
The Company has applied for a provisional patent with respect to systems and
associated methods for determining availability and pricing of goods based on
attributes. The Company has secured registration of its copyrights in the United
States for 19 of its products. The Company has service mark applications pending
for "Resynt", the Resynt logo and, "THE BUSINESS OF E-COMMERCE". Although the
Company takes steps to protect its trade secrets, there can be no assurance that
misappropriation may nevertheless occur and copyright and trade secret
protection may not be available in certain countries.
Otherwise, the Company does not hold any patents, and currently relies on a
combination of trade secret, copyright and trademark laws, and license
agreements to protect its proprietary rights in its products. The Company
believes its products, trademarks, copyrights and other proprietary rights do
not infringe the rights of third parties. If it is determined that the Company
infringes the proprietary rights of third parties, such determination may harm
the Company's business and operating results.
EMPLOYEES
As of June 30, 2000, the Company employed a total of 530 full time
employees, including 102 in sales and marketing, 99 in product development, 276
in professional services and client support, and 53 in finance, administration
and operations. The Company's employees are not represented by a labor union,
and the Company believes that its employee relations are good.
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ITEM 2. PROPERTIES
The Company's corporate headquarters, research and development, sales,
marketing, consulting and support facilities are located in Atlanta, Georgia,
where the Company occupies approximately 43,000 square feet. The Company also
maintains a regional office in Redwood City, California, which occupies
approximately 15,500 square feet, for product development, sales and consulting;
a regional sales office in Costa Mesa, California, which occupies approximately
2,900 square feet, a regional office in Waltham, Massachusetts, which occupies
approximately 6,900 square feet for product development and consulting; a
regional office in Teaneck, New Jersey, which occupies approximately 15,200
square feet for sales and consulting; a regional office in Fort Worth, Texas,
which occupies approximately 3,200 square feet for sales, product development
and consulting; an office in Alameda, California for product development and
support activities, as well as in Escondido, California, which occupies 2,900
square feet for product development and sales activities.
International offices are maintained in Belgium (Zaventem); Canada
(Mississauga); China (Hong Kong); England (Northampton); France (Paris); Germany
(Berlin); Netherlands (Utrecht); and Spain (Barcelona and Madrid). The Company
believes its facilities are adequate for its current needs and that the Company
can obtain suitable additional space as required.
ITEM 3. LEGAL PROCEEDINGS
As of and for the fiscal year ended June 30, 2000, the Company is not a
party to any pending litigation other than ordinary routine litigation that is
incidental to the operations of the business and the Company is not aware of any
threatened litigation. For a discussion of litigations and litigation
settlements pre-fiscal 2000 and pre-fiscal 2000 accounting adjustments for such
settlement amounts, See "Management's Discussion and Analysis of Financial
Condition and Results of Operations Litigation Settlements and Expenses."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The following table sets forth the range of high and low sales prices for
the Company's Common Stock on the NASDAQ National Market for each of the
quarters of fiscal 2000 and 1999. The Company's Common Stock trades under the
NASDAQ symbol ROSS.
FISCAL 2000 HIGH LOW
- ----------- -------- --------
First quarter............................................... $3.31 $1.84
Second quarter.............................................. $3.50 $2.00
Third quarter............................................... $3.81 $2.31
Fourth quarter.............................................. $2.63 $1.19
FISCAL 1999 HIGH LOW
- ----------- -------- --------
First quarter............................................... $5.06 $2.38
Second quarter.............................................. $4.38 $2.41
Third quarter............................................... $4.50 $2.63
Fourth quarter.............................................. $3.00 $1.81
The Company has never declared or paid cash dividends on its Common Stock,
and the Company does not plan to declare or pay dividends in the future. The
Company intends to use earnings to finance the expansion of its business. In
addition, the Company's line of credit agreement with its lender contains
certain covenants which limit the Company's ability to pay cash dividends. As of
October 2, 2000, the approximate number of stockholders of record of the
Company's Common Stock was 425.
ITEM 6. SELECTED FINANCIAL DATA
CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED JUNE 30,
----------------------------------------------------
2000 1999 1998 1997 1996
---- -------- -------- -------- --------
STATEMENTS OF OPERATIONS DATA:
Total revenues................................... $ 80,004 $101,791 $91,684 $78,773 $69,789
Operating earnings (loss)........................ $ (7,961) $ (3,936) $ 4,140 $ (622) $ (177)
Net earnings (loss).............................. $ (9,662) $ (5,626) $ 2,595 $(2,353) $(1,541)
Diluted net earnings (loss) per share............ $ (.41) $ (.25) $ 0.13 $ (0.13) $ (0.10)
Shares used in computing diluted net earnings
(loss) per share............................... 23,301 22,232 20,390 18,515 15,089
BALANCE SHEET DATA:
Working capital.................................. $(15,340) $ (3,745) $ 5,544 $(8,273) $(8,535)
Total assets..................................... 64,295 83,185 78,189 69,715 58,049
Long-term debt, less current portion............. 2,627 3,705 8,918 394 36
Redeemable preferred stock....................... -- -- -- 1,053 --
Total shareholders' equity....................... 20,890 29,257 30,774 22,060 18,792
Prior years' Results of Operations have been reclassified to conform with
the fiscal 2000 presentation.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
STATEMENTS IN THE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS WHICH EXPRESS THAT THE COMPANY "BELIEVES",
"ANTICIPATES", OR "PLANS TO" AS WELL AS OTHER STATEMENTS WHICH ARE NOT
HISTORICAL FACT, ARE FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. ACTUAL EVENTS OR RESULTS MAY
DIFFER MATERIALLY AS A RESULT OF THE RISKS AND UNCERTAINTIES DESCRIBED HEREIN
AND ELSEWHERE INCLUDING, IN PARTICULAR THOSE FACTORS DESCRIBED UNDER "BUSINESS"
SET FORTH IN PART I OF THIS REPORT AS WELL AS IN OTHER RISKS AND UNCERTAINTIES
IN THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE.
OVERVIEW
The Company's software product license revenues can fluctuate from quarter
to quarter depending upon, among other things, such factors as overall trends in
the United States and international economies, new product introductions by the
Company, hardware vendors and other software vendors as well as customer buying
patterns. Because the Company typically ships software products within a short
period after orders are received, and therefore maintains a relatively small
backlog, any weakening in customer demand can have an almost immediate adverse
impact on revenues and operating results. Moreover, a substantial portion of the
revenues for each quarter is attributable to a limited number of sales and tends
to be realized in the latter part of the quarter. Thus, even short delays or
deferrals of sales near the end of a quarter can cause substantial fluctuations
in quarterly revenues and operating results. Finally, certain agreements signed
during a quarter may not meet the Company's revenue recognition criteria
resulting in deferral of such revenue to future periods. Because the Company's
operating expenses are based on anticipated revenue levels and a high percentage
of the Company's expenses are relatively fixed, a small variation in the timing
of the recognition of specific revenues can cause significant variation in
operating results from quarter to quarter.
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RESULTS OF OPERATIONS
FISCAL YEARS ENDED JUNE 30, 2000, 1999, AND 1998
The following table sets forth certain items reflected in the Company's
consolidated statements of operations as a percentage of total revenues for the
periods indicated, and a comparison of such statements is shown as a percentage
increase or decrease from the prior year's results:
PERCENTAGE OF REVENUE
YEAR ENDED PERCENTAGE
JUNE 30, INCREASE (DECREASE)
------------------------------------ ---------------------
2000 1999 1998 2000/1999 1999/1998
---- -------- -------- --------- ---------
REVENUES:
Software product licenses............................. 24% 32% 41% (41)% (15)%
Consulting and other services......................... 42 40 31 (19) 46
Maintenance........................................... 34 28 28 (2) 11
--- --- --- ---- ----
Total revenues.................................... 100% 100% 100% (21)% 11%
=== === === ==== ====
OPERATING EXPENSES:
Costs of software product licenses.................... 4% 4% 4% (10)% (1)%
Costs of consulting, maintenance and other services... 50 46 39 (15) 16
Software product license sales and marketing.......... 26 31 30 (35) 4
Product development................................... 13 12 12 (16) (2)
General and administrative............................ 9 8 8 (11) 3
Provision for uncollectible accounts.................. 6 2 2 92 19
Amortization of other assets.......................... 1 1 1 (21) 11
Non-recurring costs................................... 1 0 0 N/A 0
--- --- --- ---- ----
Total operating expenses.......................... 110 104 96 (17) 8
--- --- --- ---- ----
Operating earnings (loss)......................... (10) (4) 4 (102) (210)
Other expense, net.................................... (2) (1) (1) (17) (10)
--- --- --- ---- ----
Earnings (loss) before income taxes............... (12) (5) 3 (83) (323)
Income tax benefit (expense).......................... (0) (1) 0 9 (24)
--- --- --- ---- ----
Net earnings (loss)............................... (12)% (6)% 3% (72)% (284)%
--- --- --- ---- ----
REVENUES. Total revenues decreased 21%, to $80,004,000, in fiscal 2000 from
$101,791,000 in 1999. Fiscal 1999 revenues represented an 11% increase from
revenues of $91,684,000 in fiscal 1998. Software product license revenues
decreased 41% from fiscal 1999 to 2000 and decreased 15% from fiscal 1998 to
1999. Consulting revenues decreased 19% from fiscal 1999 to 2000 and increased
46% from fiscal 1998 to 1999. Maintenance revenues from first year and renewed
maintenance agreements, both of which are recognized ratably over the
maintenance period, decreased 2% from fiscal 1999 to 2000 and increased 11% from
fiscal 1998 to 1999.
Software product license revenues in the North American, Europe and the
Asia/Pacific Rim markets decreased by 49%, 33% and 22% or $9,096,000, $3,507,000
and $663,000, respectively. The Company believes that these decreases are
principally the result of an industry-wide slowdown in customer's willingness to
purchase fully integrated ERP software in favor of similar but modular internet
enabled enterprise systems and business to business internet applications which
are specialized for their line of business. Within Europe, software product
license revenues in the U.K and Spain increased 15% and 22% respectively, which
offset decreases in the German, French and Benelux Markets.
Fiscal 1999 European software product license revenues increased from fiscal
1998's results by 26% or $2,223,000. This increase was offset by decreases in
software product license revenues in the North
10
American and Asia/Pacific Rim markets of 30% and 6% or $7,847,000 and $198,000,
respectively. The Company believes that the fiscal 1999 decrease in the North
America and European markets are principally a result of an industry-wide
slowdown in customers willingness to purchase new software because of issues
related to the year 2000 date recognition problem (Y2K) as well as a change in
buyer motivation related to the use of the internet for business to business
electronic commerce. The Y2K issue arises because certain electronic data
processing systems use two digits rather than four to define the applicable year
which may preclude proper date recognition after December 31, 1999. The Company
believes that the decrease in the Asia/Pacific Rim markets was due to the
continued depressed economic conditions that exist in this area. Software
product license revenues in France, U.K., and other European countries increased
157%, 88%, and 74% or $1,758,000, $1,241,000, and $1,113,000, respectively.
These increases were somewhat offset by decreases in the Spanish and German
Markets. The Company's open systems applications represented approximately 93%
of software product license revenues for fiscal 2000, 1999, and 1998.
Revenues from consulting and other services (which are recognized as
performed) correlate with software product license revenues (which are
recognized upon delivery), so that when software product license revenues
decrease, future period services revenues generally decrease as a result. Fiscal
2000 consulting and other services revenues decreased 19%, or $7,919000, over
fiscal 1999 results. The Company significantly lowered its use of third party
consultants in cases where the margin earned was not adequate to provide an
acceptable profit. This resulted in a reduction of approximately
$2,000,000 million in consulting revenue but an improvement of approximately
$2,000,000 in operating margin. The Company experienced shrinkage in the North
American, European and Asia/Pacific markets of 15%, 27% and 49%, respectively.
As a result of this decreased consulting and services demand the Company has
decreased the number of third party consultants as well as employee consultants
with lower than standard utilization.
Fiscal 1999 consulting and other services revenues increased 46%, or
$13,047,000, over fiscal 1998 results. The Company experienced growth in the
North American and European markets of 51% and 40%, respectively. A fiscal 1999
decline of 6% in Asia/Pacific Rim consulting revenues offset the North American
and European gains. The Company believes that the decrease in the Asia/Pacific
Rim market was due largely to the continued depressed economic conditions in
that area. The Company believes that the North American gains are largely a
result of the Company's acquisitions of Bizware in fiscal 1998 and Hipoint in
the early part of fiscal 1999, as well as continued management focus on
increasing revenues in this product line. Furthermore, the Company believes that
the European gains are attributable largely to the increase in software product
license revenues over the prior fiscal year.
Maintenance agreements are renewed annually by most of the Company's
maintenance customers. Maintenance revenues decreased 2%, or $604,000, from
fiscal 1999 to fiscal 2000. The Company believes this decrease is the result of
the general business slowdown in software sales coupled with expiration of some
maintenance contracts without renewal.
Maintenance revenues increased 11% from fiscal 1998 to 1999. Maintenance
revenues have remained essentially flat over the past three years as a net
result of increases in the Company's Renaissance CS maintenance revenues offset
to a lesser extent by some maintenance contracts which have expired without
renewal.
As a percentage of total revenues, the Company's international operations
have remained relatively consistent at 32%, 33% and 31% in fiscal years 2000,
1999 and 1998, respectively. In fiscal 2000, the Company experienced revenue
shrinkage in North America, Europe, and the Asia/Pacific Rim of 20%, 24% and 25%
respectively.
The Company's largest Pacific Rim contract represents a distributor
agreement with a Japanese Company (the "Distributor") whereby the Distributor
has an exclusive license to reproduce and sell certain Ross products in the
Pacific Rim. The Company recognizes revenue at the greater of the annual minimum
royalty amount or a contractually defined amount determined from licenses sold
by the
11
distributor. The Company and the Distributor negotiated an agreement whereby an
annual minimum royalty of $2.5 million and $1.9 million was earned during fiscal
1999 and 2000 respectively. The Company expects to earn and recognize
$1.2 million of revenue from the Distributor in fiscal 2001.
Revenues have been derived from a relatively large number of customers. No
single customer accounted for more than 10% of revenues during fiscal 2000, 1999
or 1998.
COSTS OF SOFTWARE PRODUCT LICENSES. Costs of software product licenses
include expenses related to royalties paid to third parties and product
documentation and packaging. Third party royalty expenses will vary from quarter
to quarter based on the mix of third-party products being sold. Many of the
Company's newer products have third party royalty obligations associated with
them that had not existed previously. Costs of software product licenses for
fiscal 2000 decreased by 10% to $3,503,000 from $3,895,000 in fiscal 1999. This
decrease was due to the overall reduced software volumes largely offset by a
greater amount of third-party products being bundled with the Company's product.
As a percent of software revenue, third party royalties comprised 18% versus 12%
of fiscal 2000 and fiscal 1999 revenue respectively. Costs of software product
licenses for fiscal 1999 increased by 10% from $3,536,000 in fiscal 1998. The
1999 over 1998 increase is due to a greater amount of third-party products being
bundled with the Company's products. The Company's gross profit margin resulting
from software product license revenues for fiscal 2000 was 82%, a decrease from
88% in fiscal 1999 and a decrease from 91% in fiscal 1998. Increases in third
party royalty expenses led to the decline in these margins from fiscal 1998 to
2000.
COSTS OF CONSULTING, MAINTENANCE AND OTHER SERVICES. Costs of consulting,
maintenance and other services include expenses related to consulting and
training personnel, personnel providing customer support pursuant to maintenance
agreements, and other costs of sales. From time to time the Company also uses
outside consultants to supplement Company personnel in meeting peak customer
consulting demands. Costs of consulting, maintenance and other services
decreased 15% to $39,650,000 in fiscal 2000 from $46,410,000 in fiscal 1999.
This decline is composed of a $3,977,000 decrease in third party services costs
as well as an aggregate $2,895,000 decline in employee related expenses
including salaries, benefits, supplies and other administrative expenses across
the services and consulting business. These cost decreases relate directly to
the 19% decrease in consulting revenues and the 6% decrease in average headcount
from fiscal 1999 to fiscal 2000.
Costs of consulting, maintenance and other services increased 29% to
$46,410,000 in fiscal 1999 from $36,106,000 in fiscal 1998. These cost increases
related directly to increased consulting revenues which were attributable to the
full year effect of the Bizware acquisition and the 10 month effect of the
Hipoint Systems acquisition. Furthermore, the Company experienced some
consulting revenue increases from software license agreements entered into
during fiscal 1998.
GROSS PROFIT MARGINS. The Company's gross profit margins resulting from
consulting, maintenance and other services revenues for fiscal 2000, 1999 and
1998 were 35%, 33% and 32%, respectively. The increase in gross profit margins
from fiscal 1999 to 2000 was due largely to decreased spending on third party
service providers that typically yield lower margins. Consulting, maintenance
and other service revenues represented 76% of total revenues in fiscal 2000
compared to 68% for fiscal 1999.
During fiscal 1999, in order to meet increasing customer demands and fill
services and consulting personnel vacancies, there were increases in personnel
expenses related to the hiring and training of new services and consulting
personnel who must undergo training before beginning to generate revenue.
SOFTWARE PRODUCT LICENSE SALES AND MARKETING EXPENSES. Software product
license sales and marketing expenses decreased $10,857,000 or 35% in fiscal 2000
over 1999. The decreases for fiscal 2000 over fiscal 1999, are directly related
to decreased headcount, and reduced spending on discretionary marketing
programs. Employee related expenses decreased by $6,544,000 while travel, trade
show, advertising and related expenses decreased by $3,977,000.
12
Software product license sales and marketing expenses increased $4,231,000
or 16% in fiscal 1999 over fiscal 1998. The increases for fiscal 1999 over
fiscal 1998 were directly related to increased headcount, as well as increased
sales and marketing efforts. Employee related expenses, including compensation,
increased approximately $3,200,000, travel and trade show related expenses
increased approximately $475,000 and advertising related expenses increased
approximately $400,000.
PRODUCT DEVELOPMENT EXPENSES. A summary of the components of product
development expenditures for the past three years follows (in thousands):
YEAR ENDED JUNE 30,
------------------------------------
2000 1999 1998
---- -------- --------
Expenses.................................................... $10,003 $11,959 $10,960
Amortization of previously capitalized software development
costs..................................................... (6,875) (8,806) (7,520)
------- ------- -------
Expenses, net of amortization............................... 3,128 3,153 3,440
Capitalized software development costs...................... 12,127 11,572 10,055
------- ------- -------
Total expenditures.................................... $15,255 $14,725 $13,495
------- ------- -------
Total expenditures as a percent of total revenues........... 19% 14% 15%
------- ------- -------
Capitalized software, net of amortization, as a percent of
total expenditures........................................ 34% 19% 19%
------- ------- -------
Product development expenditures increased 4% from fiscal 1999 to fiscal
2000 and increased 9% from fiscal 1998 to fiscal 1999. As a percentage of total
revenues, fiscal 2000 total expenditures increased from fiscal 1999 after a
slight decrease from fiscal 1999 compared to fiscal 1998. The primary factor in
the fiscal 2000 increase in total expenditures as a percent of revenue is the
lower revenue in fiscal 2000.
Product development expenditures during fiscal 2000 have shifted toward
internet based business to business solutions which encompass the traditional
backbone ERP as an element of a modular solution. Product development
expenditures during fiscal 2000, 1999 and 1998 were primarily focused on new
internet enabled modules and continued enhancements to the underlying technology
of released products and developing new web enabled products. During fiscal
2000, 1999 and 1998, software development costs capitalized included amounts
attributable to the development of additional international features for the
Company's Renaissance CS products, developing the 4.X series of Renaissance CS,
developing Y2K compliance for the Company's Renaissance Classic products and
development of new products aimed at end-to-end e-commerce solutions.. The
Company did not experience additional expenditures related to the Y2K compliance
of its products after December 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased 11% to $7,430,000 in fiscal 2000 from $8,337,000 in fiscal 1999.
Fiscal 1999 represented an increase of 15% from $7,258,000 in fiscal 1998. The
net decrease from 1999 to 2000 is primarily attributable to savings achieved by
an increased use of networked administrative tools, reduced network
communications costs and a reduction of administrative staffs and related costs
in both Europe and North America.
The increase from 1998 to 1999 was due to several factors. Primarily,
expenses related to upgrading the Company's computer systems and communications
systems related to Y2K increased by approximately $368,000. Travel expenses
increased approximately $200,000 as a result of increased management focus on
the Company's European operations. Legal and professional expenses increased
approximately $185,000 primarily due to the Company's re-incorporation during
fiscal 1999 as well the adoption of the shareholders rights agreement during
fiscal 1999. Furthermore, employee expense related to severance increased
approximately $172,000. Finally, rent expense increased approximately $154,000
as a result of standard rent escalations as well as the full year effect of
certain acquired leases related to business acquisitions and office relocations.
13
PROVISION FOR DOUBTFUL ACCOUNTS AND RETURNS. In fiscal 2000, 1999 and 1998,
the Company recorded provisions of $4,645,000, $2,421,000, and $1,830,000,
respectively. These provisions represent management's best estimate of the
doubtful accounts for each period.
LITIGATION SETTLEMENTS AND EXPENSES. The fiscal 1998 litigation settlement
amount represents an adjustment to the charge that was recorded during fiscal
1997. During fiscal 1997, the Company settled a dispute with a customer with the
understanding that the settlement and related legal fees would be covered under
the Company's business insurance. The Company subsequently learned that the
insurer took exception to the Company's settlement with its customer and
withheld payment on the claim, pending arbitration. In June 1997, the Company
recorded a charge of $615,000, pending settlement with its insurer, to cover the
potential settlement and legal fees. In fiscal 1998, the insurer paid the
Company $381,000 in settlement of the previously accrued claim.
AMORTIZATION OF OTHER ASSETS. Amortization of intangible assets resulted in
charges of $1,004,000, $1,263,000, and $1,024,000 in fiscal 2000, 1999 and 1998,
respectively. These charges related to the purchase of the Company in 1988 and
its subsequent acquisitions of other products and companies. During fiscal 1999,
the Company purchased HiPoint Systems Inc. The related intangible assets are
being amortized over periods ranging from two to seven years. Increases in
fiscal 1999 are directly related to the acquisition of Hipoint Systems. During
fiscal 1998, the Company purchased Bizware, Inc. The related intangible assets
are being amortized over periods ranging from two to seven years. Also during
fiscal 1998, the Company capitalized approximately $431,000 of debt issuance
costs related to the receipt of $10,000,000 of convertible debenture financing.
For a description of the convertible debenture financing, see "Liquidity and
Capital Resources." These costs are being amortized over five years. During
fiscal 1997, the Company acquired its Spanish distributor. The related goodwill
of $1,541,000 is being amortized over seven years.
NON-RECURRING COSTS. During Q3 fiscal 2000 the Company recorded a
$1,145,000 expense to cover the liability arising from separation costs
associated with 19 employees employed in sales, marketing, services and product
development in North America and Europe. At June 30, 2000, $589,000 of the
liability remained and will be paid in fiscal 2001.
OTHER INCOME AND EXPENSE. Fiscal 2000, 1999 and 1998 other income is
composed largely of interest income of $103,000, $195,000, and $100,000,
respectively. Fiscal 2000 interest income decreased from 1999 as a result of
lower invested cash balances compared to fiscal 1999. Fiscal 1999 interest
income increased from 1998 as a result of higher invested cash balances compared
to fiscal 1998. Interest expense increased from fiscal 1998 to 1999 and
increased from fiscal 1999 to fiscal 2000 as a result of increased borrowings
under the Company's revolving credit facilities and increased capital lease
activities.
INCOME TAXES. The Company recorded income tax expense of $349,000 during
fiscal 2000. This expense relates to foreign withholding taxes expensed during
the period in certain foreign jurisdictions. The Company recorded income tax
expense of $321,000 during fiscal 1999. This expense relates to a refund
received for a carry-back of certain net operating losses against prior period
income ($414,000), foreign withholding taxes expensed during the year
($473,000), an accrual for federal alternative minimum taxes ($89,000) and
accruals for other state taxes payable ($173,000). The Company recorded income
tax expense of $382,000 during fiscal 1998. This expense relates to foreign
withholding taxes expensed during the year ($337,000), and accruals for other
state taxes payable ($45,000).
At June 30, 2000 and 1999, the Company had net income taxes payable of
$248,000 and $145,000 respectively. These tax liabilities primarily relate to
various taxing jurisdictions in North America, principally Canada where the
Company has used all of its net operating loss carryforwards. The Company
anticipates recording significant future foreign withholding tax expenses
related to the aforementioned Japanese distributorship agreement, representing
10% of future annual royalty payments from this agreement. At June 30, 2000, the
Company had net operating loss carryforwards of approximately
14
$36,003,000, $13,320,000, and $11,275,000 for federal, California and foreign
tax purposes, respectively. These carryforwards, if not utilized, will expire
between fiscal 2000 and 2014.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 2000, net cash provided by operating activities increased by
$3,778,000 compared to the prior year. An aggregate net increase in non-cash
charges for depreciation, amortization and provisions for uncollectible accounts
of $42,000 and an aggregate decrease in the changes in operating assets and
liabilities including accounts receivable, pre-paid expenses, accounts payable
and accrued expenses of $7,985,000 were offset by decreased Company earnings of
$4,249,000. The decreased receivables portfolio was a result of lower revenue
volumes and improved days of sales outstanding. The decreases in accounts
payable and accrued expenses are the result of lower headcount and operating
expenses compared to the prior year. Management believes that the risk of
accounts receivable uncollectibility has been appropriately assessed and
reflected in the consolidated financial statements.
During fiscal 2000, the Company required $12,303,000 for investing
activities versus $13,091,000 in the prior year, a decrease of $788,000.
Investment in property and equipment decreased by $1,505,000 over the prior year
as a result of lower spending on computers and infrastructure assets. 1999
spending programs aimed at expansion of European operations as well asY2K
preparedness activities were completed early in fiscal 2000 and contributed to
lower fiscal 2000 spending. Capitalized computer software costs increased by
$549,000 due to timing of development work performed. The Company financed its
continuing operations during fiscal 2000 through cash generated from operations
and available credit facilities.
Cash flows from financing activities decreased $7,922,000 versus the prior
fiscal year. In fiscal 2000, borrowings under the line of credit decreased by
approximately $2,090,000 from fiscal 1999 while borrowings under the line of
credit increased from fiscal 1999 over 1998 by $8,576,000.
At June 30, 2000, the Company had $2,010,000 of cash and cash equivalents.
The Company also has a revolving credit facility with an asset-based lender with
a maximum credit line of $15,000,000, a maturity date of October 31, 2000, and
an interest rate equaling the Prime Rate plus 2%. Borrowings under the credit
facility are collateralized by substantially all assets of the Company. At
June 30, 2000, the Company had $8,747,000 outstanding against the $15,000,000
revolving credit facility, and based on the eligible accounts receivable at
June 30, 2000, the Company's cash and remaining borrowing capacity under the
revolving credit facility total approximately $2,611,000.
On December 29, 1995, the Company entered into a Subscription Agreement (the
"Agreement") with a foreign institutional investor pursuant to which the
investor purchased 500,000 shares of the Company's Series A Mandatory Redeemable
Convertible Preferred Stock for an aggregate purchase price of $2,000,000. In
connection with this transaction, the investor granted the Company options (the
"Options") to require the investor to purchase shares of the Company's Mandatory
Redeemable Convertible Preferred Stock with an aggregate value of $4,000,000
during the period from and including July 1, 1996 through and including
December 30, 1998. The Company created and reserved 500,000 shares of its
Series B Mandatory Redeemable Convertible Preferred Stock and 500,000 shares of
its Series C Mandatory Redeemable Convertible Preferred Stock for issuance and
sale to the investor upon exercise of the Options. In addition, the Company
granted the investor a warrant (the "Warrant") to purchase 400,000 shares of the
Company's Common Stock at an exercise price of $5.576 per share during the
period from and including July 1, 1997 through and including December 29, 2000.
Pursuant to the Agreement, the Company exercised its first Option on
July 8, 1996. Concurrently, the investor also agreed to invest an additional
$2,000,000 under terms similar to those in the Agreement. In exchange for the
additional investment, the Company granted the investor a warrant for an
additional 640,000 shares of the Company's Common Stock. This warrant was
exercisable during the period from and including July 1, 1997 through and
including December 29, 2000, at a maximum price of $8.00 per share. The gross
proceeds from the July 1996 transactions were $4,000,000. The Company exercised
its final
15
Option to require the investor to invest $2,000,000 on January 6, 1997 when the
investor purchased 200 shares of the Company's newly created Series E Redeemable
Preferred Stock.
During fiscal 1996, the investor converted all of their Series A Mandatory
Redeemable Convertible Preferred Stock to common stock. During fiscal 1997, the
investor converted all of their Series B and Series C Mandatory Redeemable
Convertible Preferred Stock and 93 shares of their Series E Mandatory Redeemable
Convertible Preferred Stock to common stock.
On April 23, 1998, the Company issued and sold 353,000 shares of its Common
Stock to this investor upon the exercise of the warrant to purchase 640,000
shares of the Company's Common Stock mentioned above. The Company and the
investor also agreed to cancel the remaining 287,000 shares of Common Stock
subject to the warrant. The aggregate exercise price paid by this investor was
$1,141,946, representing a per share exercise price of $3.23. The Company and
the investor agreed to reduce the exercise price from that set forth in the
warrant certificate, dated July 3, 1996, representing the warrant in
consideration for the cancellation. The Company has used the proceeds from this
exercise to fund its current operations. On April 24, 1998, the Company issued
286,633 shares of its Common Stock to this investor upon the conversion of the
remaining 107 shares of the Series E Mandatory Redeemable Convertible Preferred
Stock. Because this transaction involved the exchange of one security for
another security, the investor paid no additional consideration to the Company.
On February 6, 1998, the Company closed a private placement of up to
$10,000,000 of convertible subordinated debentures to certain institutional
investors (the "Investors") pursuant to Regulation D promulgated under the
Securities Act of 1933, as amended. The Investors invested $6,000,000 on
February 6, 1998 and $4,000,000 on June 11, 1998. The material agreements
between the Company and each Investor have been filed as exhibits to the Current
Report on Form 8-K filed with the Securities and Exchange Commission by the
Company on February 12, 1998. $3,033,000 and $1,933,000 of these debentures
remained outstanding at June 30, 1999 and June 30, 2000, respectively. With the
exception of the redemption described below, the difference between the original
$10,000,000 borrowing and amounts outstanding at the above mentioned dates
represents conversion of the debt into shares of the Company's Common Stock at
various conversion prices as determined in accordance with the convertible
debenture agreement. The Company notified the Investors that it would redeem
$4,000,000 of the convertible subordinated debentures on October 7, 1998 (the
"Redemption Date") at a redemption price of $4,320,000 (108 percent of the face
value of the redeemed debentures) plus interest accrued through the redemption
date. On the Redemption Date, the Company actually redeemed $2,667,000 of the
convertible subordinated debentures at a redemption price of $2,880,000. The
difference between the face amount of debentures redeemed and the total
redemption price paid represents the conversion premium which has been reported
as an extraordinary item during fiscal 1999. The Company and the Investor
holding the convertible subordinated debenture that was not redeemed negotiated
certain changes to the conversion features of the debenture that, among other
things, precludes conversion prior to October 7, 1999.
The Company's ability to meet its cash requirements for operations and
recurring capital expenditures will depend upon funds expected to be generated
from operations and amounts available under its line of credit facility.
However, the Company will be required to seek additional financing. The Company
is negotiating alternatives to raise additional funds through public or private
financing or other arrangements. The Company cannot assure you that additional
funding will be available on favorable terms. Furthermore, any additional equity
financing may be dilutive to stockholders, and debt financing, if available, may
involve restrictive covenants. The Company's failure to raise capital when
needed may harm its business and operating results. See note 1 to the
consolidated financial statements, Note 1b, "Basis of Presentation/Going
Concern.
16
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998 the Financial Accounting Standards Board issued Financial
Accounting Standard (FAS) No. 133 "Accounting for Derivative Instruments and
Hedging Activities". This new standard as amended will be effective for the
Company in fiscal 2001, and requires companies to record derivatives on the
balance sheet as assets or liabilities, measured at fair value. Any fair value
changes will be recorded in net income or comprehensive income. The adoption of
this standard will not have a material effect on the Company's financial
statements.
OTHER MATTERS
On September 1, 1998, the Board of Directors of the Company approved a
Preferred Shares Rights Agreement dated September 4, 1998, whereby the Board has
declared a dividend distribution of one Preferred Shares Purchase Right (the
"Rights") on each outstanding share of the Company's Common Stock. Each Right
will entitle stockholders to buy 1/1000th of a share of the Company's Series B
Participating Preferred Stock at an exercise price of $21.75. The Rights will
become exercisable following the tenth day after a person or group announces the
acquisition of 15% or more of the Company's Common Stock or announces
commencement of a tender offer the consummation of which would result in
ownership by the person or group of 15% or more of the Common Stock. The Company
will be entitled to redeem the Rights at $.01 per Right at any time on or before
the tenth day following acquisition by a person or group of 15% or more of the
Company's Common Stock.
On September 18, 1998 the Board of Directors of the Company approved an
adjustment to the exercise price for certain outstanding stock options held by
all current employees, which have an exercise price of $3.00 and above. In
consideration for this repricing offer, officers of the Company participating in
the option repricing were required to forfeit 10% of the shares subject to each
option being repriced, while non-officer employees participating in the option
repricing are subject to a one year limitation on the exercisability of repriced
options subject to certain exceptions. The one year limitation on ability to
exercise will expire on September 28, 1999. The revised exercise price was
established by reference to the closing price of the Company's Common Stock on
September 28, 1998, which was approximately $2.59. Approximately 90 employees
participated in the repricing with approximately 1,336,000 options being
repriced. Of the stock options repriced, options to purchase approximately
831,000 shares were held by executive officers of the Company.
On January 7, 1999, the Company entered into employment agreements with each
of J. Patrick Tinley, the Company's President and Chief Operating Officer and
member of the Board of Directors, and Dennis V. Vohs, the Company's Chairman of
the Board of Directors and Chief Executive Officer (the Employment Agreements).
In addition to a salary and benefits, each employment agreement provides the
employee with a continuation of salary and benefits for a twenty-four month
period immediately following the employee's termination of employment by the
Company "without cause" (as that term is defined in the Employment Agreement).
In addition, if within the first nine months following a "change of control" of
the Company the employee terminates his employment with the surviving
corporation for "good reason" or the surviving corporation terminates the
employee's employment for any reason other than "cause" or "disability" (as each
of these terms in quotes is defined in the Employment Agreements), the employee
shall then be entitled to a continuation of then applicable salary for the
twenty-four month period immediately following the termination date and all
unvested stock options and similar rights shall become vested and exercisable.
Mr. Tinley's and Mr. Vohs' Employment Agreements have been filed as
Exhibit 10.3 and Exhibit 10.4, respectively to the Company's Quarterly Report on
Form 10-Q for the third quarter of fiscal 1999, filed May 17, 1999.
On September 17, 1999, the Company entered into an employment agreement with
Robert B. Webster, the Chief Financial Officer and Secretary of the Company. In
addition to a salary and benefits, the employment agreement provides the
employee with a continuation of salary and benefits for a twelve
17
month period immediately following the employee's termination of employment by
the Company "without cause" (as that term is defined in the Employment
Agreement). In addition, if within the first nine months following a "change of
control" of the Company the employee terminates his employment of the surviving
corporation for "good reason" or the surviving corporation terminates the
employee's employment for any reason other than "cause" or "disability" (as each
of these terms in quotes is defined in the Employment Agreements), the employee
shall then be entitled to a continuation of then applicable salary for the
twelve month period immediately following the termination date and all unvested
stock options and similar rights shall become vested and exercisable.
Mr. Webster's Employment Agreement was filed as Exhibit 10.5 to Company's 1999
Annual Report on Form 10-K, filed September 28, 1999.
On September 12, 2000, the Company announced a strategic restructuring aimed
at reducing costs and improving efficiencies. Under the restructuring, the
Company reduced 125 positions across the company as well as accelerated efforts
to eliminate unneeded office space, improve productivity through the use of
technology and focus on increased revenues through the use of distributors. Cost
savings associated with the restructuring are expected to be $12,000,000 on an
annualized basis.
YEAR 2000 IMPLICATIONS
The Year 2000 issue arises because certain electronic data processing
systems use two digits rather than four to define the applicable year which may
preclude proper date recognition after December 31, 1999.
The Company expended approximately $350,000 related to year 2000
preparedness of its internal systems. Management of the Company believes that
the preparations were adequate, and there have been no year 2000 related
problems in the Company's internal systems between December 31, 1999 and the
date of filing of this Report on Form 10-K. Further, management believes that
the more recent versions of its product were developed as year 2000 compliant
while older versions of its product were brought into year 2000 compliance
through updates provided in conjunction with customer's ongoing maintenance
contracts. Management believes that its product design was adequate, and
management has not been made aware of any year 2000 processing problems in the
Company's products between December 31, 1999 and the date of the filing of this
Report on Form 10-K.
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN EXCHANGE: The Company has a world-wide presence and as such
maintains offices and derives revenues from sources overseas. For fiscal 2000,
international revenues as a percentage of total revenues was approximately 32%.
The Company's international business is subject to typical risks of an
international business, including, but not limited to: differing economic
conditions, changes in political climates, differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility. Accordingly,
the Company's future results could be materially adversely impacted by changes
in these or other factors. The effect of foreign exchange rate fluctuations on
the Company in fiscal 2000 was not material.
INTEREST RATES: The Company's exposure to interest rates relates primarily
to the Company's cash equivalents and certain debt obligations. The Company
invests in financial instruments with original maturities of three months or
less. Any interest earned on these investments is recorded as interest income on
the Company's statement of operations. Because of the short maturity of the
Company's investments, a near-term change in interest rates would not materially
affect the Company's financial position, results of operations, or cash flows.
Certain of the Company's debt obligations include a variable rate of interest. A
significant, near-term change in interest rates could materially affect the
Company's financial position, results of operations or cash flows.
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference herein
from Part IV Item 14(a) (1) and (2) of this Form 10-K Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company filed a Current Report on Form 8-K/A dated July 2, 1998 which
reported under Item 4, that the Company terminated, by dismissal, its
relationship with Coopers & Lybrand L.L.P. as principal accountants. At the same
time, the Company announced the engagement of Arthur Andersen L.L.P. as its
principal accountants. The decision to change accountants was approved by the
Audit Committee of the Board of Directors. The Company also stated that there
were no disagreements between Coopers & Lybrand L.L.P. and the Company.
19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by this Item is
incorporated by reference to the Company's Proxy Statement.
EXECUTIVE OFFICERS
The executive officers of the Company and their ages at June 30, 2000 are as
follows:
NAME AGE POSITION
- ---- -------- --------
Dennis V. Vohs............................ 56 Chairman of the Board
J. Patrick Tinley......................... 52 President and CEO, and a Director
Robert B. Webster......................... 52 Executive Vice President, Chief Financial
Officer and Secretary
Peter M. Fausel........................... 40 Senior Vice President, Worldwide Sales and
Marketing
Eric W. Musser............................ 35 Vice President Product Development &
Support
Verome M. Johnston........................ 35 Vice President and Controller
Rodney D. Jones........................... 48 Vice President, European Operations
Oscar Pierre Prats........................ 44 Vice President, Global Channels
The executive officers are elected by and serve at the discretion of the
Board of Directors. There are no family relationships among the executive
officers of the Company.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors to file initial reports of share ownership and
report changes in ownership with the Securities and Exchange Commission (the
"SEC"). Such persons are required by SEC regulations to furnish the Company with
copies of all Section 16(a) forms filed by such persons.
Based solely on the Company's review of such forms furnished to the Company
and written representations from certain reporting persons, the Company believes
that all filing requirements applicable to the Company's executive officers and
directors were complied with.
MR. VOHS has served as Chairman of the Board since November 1988. He served
as Chairman of the Board and Chief Executive Officer from November 1988 until
June 2000 at which time Mr. Tinley (see below) succeeded Mr. Vohs as Chief
Executive Officer. Prior to joining the Company, Mr. Vohs held various executive
positions with Management Science America, Inc. over an 18 year period. Prior to
MSA, he held various technical positions at IBM. Mr. Vohs received a Bachelors
of Science in Industrial Engineering from Georgia Tech University.
MR. TINLEY was promoted to CEO and President in July 2000. He served as
President and Chief Operating Officer from 1995 to June 2000. He has been a
director of the Company since 1993. Mr Tinley joined the Company in
November 1988 as Executive Vice President, Business Development and has served
as Executive Vice President, Product Development and Executive Vice President,
Product Development & Client Services. Prior to 1988, Mr. Tinley held management
positions with Management Science of America, Inc. and Royal Crown Companies.
Mr. Tinley received a Bachelors in Science from Columbus College.
MR. WEBSTER, Executive Vice President, Chief Financial Officer and
Secretary, joined the Company in June 1998 as VP/CFO. Prior to joining the
Company, Mr. Webster served, since February 1995, as Executive Vice
President/CFO of Americom Holdings, Inc. a marketing information services
company and prior to that in senior financial management positions at Wang
Laboratories, Inc. and Unisys Corporation.
20
Mr. Webster is a Certified Public Accountant in the State of Georgia.
Mr. Webster received both BS in Accounting and Computer Science, as well as a
MBA in Information Systems degrees from the Jesuit College of New Jersey, St.
Peter's College.
MR. FAUSEL joined the Company in February 2000 as Senior Vice President
North American Sales and Worldwide Marketing. Prior to joining Ross, Mr. Fausel
held senior management positions with Invensys PLC. These positions included
Vice President of Global Accounts and Industry Marketing, Managing Director of
the South Region Business Unit and South Regional Sales Director. Prior to his
work with Invensys, Mr. Fausel held senior management positions with ABB in
Europe and North America. Mr. Fausel holds a Bachelor of Science degree in
Finance from the University of Florida.
MR. MUSSER joined the Company in 1993 and was promoted to CTO in May of
2000. He has served in development for over 5 years and has held the position of
Vice President, Development for the past 2 years. Mr. Musser has also held
senior positions in Marketing and has been a critical influence in changing the
Company from client/server solutions to Internet based solutions. From 1989 to
1993 Mr. Musser held IT management positions in the steel industry.
MR. JOHNSTON joined the Company in July 1998 as Corporate Controller. He was
promoted to Vice President in August 1999. Immediately prior to joining the
Company, Mr. Johnston served as Vice President and Chief Financial Officer of
the North America area for Sunds Defibrator, where he had been employed since
June of 1991. Prior to that, Mr. Johnston was employed with Deloitte & Touche.
Mr. Johnston maintains a CPA certificate in Georgia and earned Bachelor of
Business Administration degrees in Accounting and Finance from Valdosta State
University.
MR. JONES joined the Company in February 1998 as Managing Director of the
UK. He was promoted to Vice President of European Operations for Direct Channels
at the beginning of 2000. Mr. Jones has served several US Companies at Vice
President level for Europe and International territories. Most recently he
served as International Director for Western Data Systems and prior to that as
European VP for Cincom's Manufacturing Applications Division. Mr. Jones is a
Mechanical and Production Engineer and qualified as a Certified Engineer from
Mid-Kent College-UK.
MR. PIERRE joined the Company in 1997 as Vice President, European and Latin
American Operations following the Company's acquisition of its Spanish
subsidiary. He currently serves as Vice President Global Channels, and
responsible for the Company direct Operations in Spain, and the European, Middle
East and Latin America Distributors. Prior to the acquisition, he was the
majority shareholder of the Company's Spanish subsidiary. From April 1990 to
1995, Mr. Pierre was founder and majority shareholder of Software International
S.A. Mr. Pierre received a degree in Industrial Engineering overseas from The
University Technical School of Barcelona.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. CONSOLIDATED FINANCIAL STATEMENTS. The following Consolidated Financial
Statements of Ross Systems, Inc. are filed as part of this report:
PAGE
--------
Fiscal 2000, 1999 and 1998 Report of Arthur Andersen LLP,
Independent Public Accountants............................ F-1
Consolidated Balance Sheets as of June 30, 2000 and 1999.... F-2
Consolidated Statements of Operations--Years Ended June 30,
2000, 1999, and 1998...................................... F-3
Consolidated Statements of Cash Flows--Years Ended June 30,
2000, 1999, and 1998...................................... F-4
Consolidated Statements of Shareholders' Equity--Years Ended
June 30, 2000, 1999, and 1998............................. F-5
Notes to Consolidated Financial Statements.................. F-6
2. FINANCIAL STATEMENT SCHEDULE. The following financial statement schedule
of Ross Systems, Inc. for the Years Ended June 30, 2000, 1999, and 1998
is filed as part of this Report and should be read in conjunction with
the Consolidated Financial Statements of Ross Systems, Inc.
SCHEDULE PAGE
- -------- --------
II Valuation and Qualifying Accounts........................ S-1
Schedules not listed above have been omitted because they are not
applicable or are not required, or the information required to be set
forth therein is included in the Consolidated Financial Statements or
Notes thereto.
3. EXHIBITS. The Exhibits listed on the accompanying Index to Exhibits
immediately following the financial statement schedules are filed as part
of, or incorporated by reference into, this Report.
(b) Reports on Form 8-K.
On July 2, 1998, the Company filed a report of Form 8-K which reported under
item 4, that the Company had appointed Arthur Andersen LLP as its auditor for
the fiscal year ended June 30, 1998. This change was due to the pending July 1,
1998 merger of Coopers & Lybrand L.L.P. with Price Waterhouse & Company. The
merger would have created a potential independence conflict since the Company's
President and Chief Operating Officer has a brother who is a partner in the
Atlanta office of Price Waterhouse & Company.
On July 23, 1998, the Company filed a report on Form 8-K/A which amended the
June 29, 1998 filing above to correctly identify the Company's state of
incorporation as Delaware rather than California.
On July 24, 1998, the Company filed a report of Form 8-K which reported
under item 5, that, effective June 25, 1998, the Company had merged with Ross
Systems Inc., a California corporation, with the Company being the surviving
entity for the purposes of effecting a change in domicile from California to
Delaware.
On April 2, 1999, the Company filed a report on form 8-K which stated under
item 5 that the Company had made a press release with regards to the financial
results of its third quarter of fiscal 1999, ended March 31, 1999.
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Atlanta, State of Georgia, on the 13th day of October, 2000.
ROSS SYSTEMS, INC.
By:
-----------------------------------------
J. Patrick Tinley
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints J. Patrick Tinley his attorney-in-fact, with the
power of substitution, for him in any and all capacities, to sign any amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that the said attorney-in-fact,
or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ J. PATRICK TINLEY President and Chief Executive
------------------------------------------- Officer (Principal October 13, 2000
J. Patrick Tinley Executive Officer)
Executive Vice President,
/s/ ROBERT B. WEBSTER Chief Financial Officer
------------------------------------------- (Principal Financial and October 13, 2000
Robert B. Webster Accounting Officer) and
Secretary
/s/ DENNIS V. VOHS
------------------------------------------- Chairman of the Board and a October 13, 2000
Dennis V. Vohs Director
/s/ J. WILLIAM GOODHEW
------------------------------------------- Director October 13, 2000
J. William Goodhew
/s/ MARIO M. ROSATI
------------------------------------------- Director October 13, 2000
Mario M. Rosati
/s/ BRUCE J. RYAN
------------------------------------------- Director October 13, 2000
Bruce J. Ryan
23
ROSS SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED JUNE 30, 2000
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Certificate of the Registrant, as amended (1)
3.2 Certificate of Designation of Rights, Preferences and
Privileges of Series B Preferred Stock of the Registrant (3)
3.4 Certificate of Amendment to the Bylaws of the Registrant
4.3 Form of the subordinated debenture agreement due February 6,
2003 issued by the Registrant to each investor (3)
4.4 Registration Rights Agreement between the Registrant and
each Investor (3)
10.1 Preferred Share Rights Agreement, dated September 4, 1999
between the Registrant and BankBoston N.A. (2)
10.2A Extension Agreement and Amendment to Loan Documents dated
March 21, 1997 between Registrant and Coast Business Credit,
a division of Southern Pacific Thrift and Loan Association
(4)
10.2B Extension Agreement and Amendment to Loan Documents dated
August 18, 1995 between Registrant and CoastFed Business
Credit Corporation ("Coast") (4)
10.2C First Amendment to Loan and Security Agreement dated June
30, 1995 between Registrant and Coast (4)
10.2D Loan and Security Agreement dated October 11, 1994 between
Registrant and Coast (4)
10.3 Employment Agreement dated January 7, 1999, between Mr.
Patrick Tinley and the Registrant (5)
10.4 Employment Agreement dated January 7, 1999, between Mr.
Dennis Vohs and the Registrant (5)
10.5 Employment Agreement dated September 13, 1999, between Mr.
Robert B. Webster and the Registrant (6)
21.1 Listing of Subsidiaries of Registrant
23.1 Consent of Arthur Andersen LLP
24.1 Power of Attorney (included on signature page)
27 Financial Data Schedule
- ------------------------
(1) Incorporated by reference to the exhibit filed with the Registrant's current
Report on Form 8-K filed July 24, 1998.
(2) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form 8-A filed September 4, 1998.
(3) Incorporated by reference to the exhibit filed with the Registrant's current
report on Form 8-K filed February 12, 1998.
(4) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form 10-K/A filed April 30, 1998.
(5) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 filed
May 17, 1999.
(6) Incorporated by reference to the exhibit filed with the Registrant's Report
on Form 10-K filed September 28, 1999.
24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Ross Systems, Inc.:
We have audited the accompanying consolidated balance sheets of ROSS
SYSTEMS, INC. AND SUBSIDIARIES (a Delaware corporation) as of June 30, 2000 and
1999 and the related consolidated statements of operations, shareholder's equity
and cash flows for each of the three years in the period ended June 30, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ross Systems, Inc. and
subsidiaries as of June 30, 2000 and 1999 and the results of their operations
and their cash flow for each of the three years in the period ended June 30,
2000, in conformity with accounting principles generally accepted in the United
States.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 1 to the consolidated financial statements, the Company has suffered
recurring losses from operations that raises substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Atlanta, Georgia
August 11, 2000
F-1
ROSS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30,
-------------------
2000 1999
---- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,010 $ 6,294
Accounts receivable, less allowance for doubtful accounts
and returns of $3,571 and $2,884 in 2000 and 1999,
respectively............................................ 21,927 37,593
Prepaid and other current assets.......................... 1,501 2,591
-------- --------
Total current assets.................................... 25,438 46,478
Property and equipment...................................... 3,009 5,172
Computer software costs..................................... 32,637 27,261
Other assets................................................ 3,211 4,274
-------- --------
Total assets............................................ $ 64,295 $ 83,185
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of debt.............................. $ 10,148 $ 12,536
Accounts payable.......................................... 6,949 10,232
Accrued expenses.......................................... 5,459 8,743
Income taxes payable...................................... 248 145
Deferred revenues......................................... 17,974 18,567
-------- --------
Total current liabilities............................... 40,778 50,223
Long-term debt, less current installments................... 2,627 3,705
-------- --------
Total liabilities....................................... 43,405 53,928
-------- --------
Shareholders' equity:
Preferred stock, no par value 5,000,000 shares authorized; 0
shares issued and outstanding............................. -- --
Common stock, $0.001 par value; 35,000,000 shares
authorized; 23,804,191 and 22,904,312 shares issued and
outstanding at June 30, 2000 and 1999, respectively..... 24 23
Additional paid-in capital................................ 85,780 84,260
Accumulated deficit....................................... (63,034) (53,371)
Accumulated other comprehensive income (deficit).......... (1,880) (1,655)
-------- --------
Total shareholders' equity.............................. 20,890 29,257
-------- --------
Total liabilities and shareholders' equity.................. $ 64,295 $ 83,185
-------- --------
See accompanying Notes to Consolidated Financial Statements.
F-2
ROSS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED JUNE 30,
------------------------------
2000 1999 1998
---- -------- --------
Revenues:
Software product licenses................................. $18,943 $32,207 $38,029
Consulting and other services............................. 33,339 41,258 28,211
Maintenance............................................... 27,722 28,326 25,444
------- ------- -------
Total revenues.......................................... 80,004 101,791 91,684
------- ------- -------
Operating expenses:
Costs of software product licenses........................ 3,503 3,895 3,536
Costs of consulting, maintenance and other services
(exclusive of non recurring expense of $208 shown
below).................................................. 39,650 46,410 36,106
Software product license sales and marketing (exclusive of
non recurring expense of $687 shown below).............. 20,585 31,442 27,211
Product development (exclusive of non recurring expense of
$250 shown below)....................................... 10,003 11,959 10,960
General and administrative................................ 7,430 8,337 7,258
Provision for uncollectible accounts...................... 4,645 2,421 1,830
Provision / settlement of litigation claim................ -- -- (381)
Amortization of other assets.............................. 1,004 1,263 1,024
------- ------- -------
Non-recurring costs....................................... 1,145
Total operating expenses................................ 87,965 105,727 87,544
------- ------- -------
Operating earnings (loss)............................... (7,961) (3,936) 4,140
Other income (expense):
Interest income........................................... 103 196 100
Interest expense.......................................... (1,455) (1,352) (1,263)
------- ------- -------
Earnings (loss) before income taxes..................... (9,313) (5,092) 2,977
Extraordinary item, net of tax.............................. -- (213) --
Income tax expense.......................................... 349 321 382
------- ------- -------
Net earnings (loss)..................................... $(9,662) $(5,626) $ 2,595
======= ======= =======
Net earnings (loss) per common share -- basic (Note 1)...... $ (0.41) $ (0.25) $ 0.13
======= ======= =======
Net earnings (loss) per common share -- diluted (Note 1).... $ (0.41) $ (0.25) $ 0.13
======= ======= =======
Shares used in per share computation -- basic (Note 1)...... 23,301 22,232 19,734
======= ======= =======
Shares used in per share computation -- diluted (Note 1).... 23,301 22,232 20,390
======= ======= =======
See accompanying Notes to Consolidated Financial Statements.
F-3
ROSS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED JUNE 30,
------------------------------
2000 1999 1998
---- -------- --------
Cash flows from operating activities:
Net earnings (loss)....................................... $(9,662) $(5,413) $ 2,595
Adjustments to reconcile net earnings (loss) to net cash
(used in) provided by operating activities:
Non-cash stock compensation costs....................... 50 -- --
Extraordinary loss on early debt extinguishment......... -- (213) --
Litigation settlements and expenses
Depreciation and amortization of property and
equipment............................................. 2,272 2,526 2,902
Amortization of computer software costs................. 6,875 8,806 7,520
Amortization of other assets............................ 1,004 1,263 1,024
Provision for uncollectible accounts.................... 4,645 2,422 1,830
Changes in operating assets and liabilities, net of
acquisition:
Accounts receivable................................... 10,961 (5,394) (4,225)
Prepaid and other current assets...................... 1,074 (721) 320
Income taxes recoverable/payable...................... 104 (256) 188
Accounts payable...................................... (3,367) 3,811 (2,601)
Accrued expenses...................................... (3,113) (732) 521
Deferred revenues..................................... (612) 350 2,207
Other, net............................................ -- 4 (86)
------- ------- --------
Net cash provided by operating activities........... 10,231 6,453 12,195
------- ------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (308) (1,813) (1,242)
Computer software costs capitalized....................... (12,121) (11,572) (10,055)
Other..................................................... 126 294 (390)
------- ------- --------
Net cash used in investing activities............... (12,303) (13,091) (11,618)
------- ------- --------
Cash flows from financing activities:
Net line of credit activity............................... (2,090) 8,576 (7,856)
Capital lease payments.................................... (276) (432) (263)
Retirement of convertible debt............................ -- (2,667) (431)
Proceeds from issuance of convertible debt................ -- -- 10,000
Proceeds from issuance of common stock.................... 222 301 1,262
------- ------- --------
Net cash provided by financing activities........... (2,144) 5,778 2,712
------- ------- --------
Effect of exchange rate changes on cash..................... (68) (94) (51)
------- ------- --------
Net increase (decrease) in cash and cash equivalents........ (4,284) (954) 3,238
------- ------- --------
Cash and cash equivalents at beginning of fiscal year....... 6,294 7,248 4,010
------- ------- --------
Cash and cash equivalents at end of fiscal year............. $ 2,010 $ 6,294 $ 7,248
======= ======= ========
See accompanying Notes to Consolidated Financial Statements.
F-4
ROSS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
ACCUMULATED
COMMON STOCK OTHER TOTAL
------------------- PAID IN ACCUMULATED COMPREHENSIVE SHAREHOLDERS' COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT INCOME (DEFICIT) EQUITY INCOME
-------- -------- -------- ------------ ---------------- ------------- --------------
Balances as of June 30,
1997........................ 19,245 $ 73,756 $(50,340) $(1,356) $ 22,060
Exercise of stock options..... 11 35 35
Exercise of common stock
warrants.................... 353 1,142 1,142
Conversion of preferred
stock....................... 287 1,053 1,053
Conversion of convertible
debentures.................. 392 1,616 1,616
Issuance of stock for
acquisition................. 703 2,057 2,057
Issuance of stock pursuant to
employee stock purchase
plan........................ 116 301 301
Stock issuance costs.......... (293) (293)
Effect of foreign currency
translation................. 208 208 208
Reincorporation............... (79,646) 79,646
Net earnings.................. 2,595 2,595 2,595
------ -------- ------- -------- ------- -------- -------
Comprehensive income
(deficit)................... 2,803
=======
Balances as of June 30,
1998........................ 21,107 $ 21 $79,646 $(47,745) $(1,148) $ 30,774
------ -------- ------- -------- ------- --------
Exercise of stock options..... 92 104 104
Issuance of stock for
acquisition................. 467 1 1,546 1,547
Issuance of stock pursuant to
employee stock purchase
plan........................ 122 322 322
Stock issuance costs.......... (52) (52)
Effect of foreign currency
translation................. (507) (507) (507)
Conversion of convertible
debentures.................. 1,116 1 2,694 2,695
Net loss...................... (5,626) (5,626) (5,626)
------ -------- ------- -------- ------- -------- -------
Comprehensive income
(deficit)................... (6,133)
=======
Balances as of June 30,
1999........................ 22,904 $ 23 $84,261 $(53,372) $(1,655) $ 29,257
Exercise of stock options..... 10
Issuance of stock for hiring
bonus....................... 19 50 50
Conversion of convertible
debentures.................. 732 1 1,248 1,249
Issuance of stock pursuant to
employee stock purchase
plan........................ 139 222 222
Effect of foreign currency
translation................. (225) (225) (225)
Net loss...................... (9,662) (9,662) (9,662)
------ -------- ------- -------- ------- -------- -------
Comprehensive income
(deficit)................... (9,887)
=======
Balances as of June 30,
2000........................ 23,804 $ 24 $85,780 $(63,034) $(1,880) $ 20,890
====== ======== ======= ======== ======= ========
See accompanying Notes to Consolidated Financial Statements.
F-5
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BUSINESS OF THE COMPANY
Ross Systems, Inc. (the "Company") develops and markets proprietary
financial, manufacturing, distribution and human resources software packages,
complemented by a relational fourth generation programming environment. It also
provides services such as professional consulting services, custom application
development, education and on-line support. The Company operates in one business
segment and no individual customer accounted for more than 10% of total
revenues. The Company does not have a concentration of credit risk in any one
industry or geographic region.
(B) BASIS OF PRESENTATION/GOING CONCERN
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant inter-company
balances and transactions have been eliminated in consolidation.
The Company operated at a profit of $2,595,000 for the fiscal year ended
June 30, 1998 and had losses of $5,626,000, and $9,662,000 for the fiscal years
ended June 30, 1999 and June 30, 2000, respectively.
Additionally, at June 30, 2000, the Company had an accumulated deficit of
$63,034,000 a stockholders' equity of $20,890,000, and a working capital
deficiency of $15,340,000. The Company will require additional financing for
working capital for a period of time until profitability is achieved.
On August 31, 2000, the Company initiated a rationalization of activities to
reduce expenses and cash usage in its operations in an effort to achieve future
profitability. The estimated annualized improvement due to a 125 person
reduction in force, a short term hiring freeze and reduction in excess real
estate facilities and related expenses, is expected to reduce cash expenditures
by approximately $1,000,000 per month or $12,000,000 on an annualized basis.
The Company has engaged a private placement agent to attempt to secure a
private placement of up to 20% of the value of the Company's common shares.
Additionally the company is renegotiating its asset based lending facility and
believes it will be able to secure a greater advance rate on certain
international receivables.
The Company has recently achieved general availability on its E Commerce
products that work in conjunction with its large base of installed customers and
believes that these efforts will position them favorably to grow revenues and
improve operating margins, while continuing to minimize operating costs. There
can be no assurance that the Company will be successful in growing revenues or
operating profitably.
The accompanying consolidated financial statements have been prepared
assuming that the Company, will continue as a going concern, which contemplates
the realization of assets and the liquidation of liabilities in the normal
course of business. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
(C) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
F-6
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
(D) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is accumulated using
the straight-line and declining balance methods over the estimated useful lives
of the respective assets, generally three to seven years. Leasehold improvements
and equipment under capital leases are amortized using the straight-line method
over the shorter of the terms of the related leases or the respective useful
lives of the assets.
(E) NET EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Basic earnings (loss) per common share are computed by dividing net earnings
or net loss by the weighted average number of common shares outstanding during
the period. Diluted earnings per common and common equivalent share is computed
by dividing net earnings by the weighted average number of common and common
equivalent shares outstanding during the period. Common stock equivalents are
not considered in the calculation of net loss per share when their effect would
be antidilutive.
The following is a reconciliation of the numerators of diluted earnings
(loss) per share.
FOR THE YEAR ENDED JUNE 30,
------------------------------
2000 1999 1998
-------- -------- --------
Net earnings (loss)............................... $(9,662) $(5,626) $2,595
Payment in kind interest on convertible
debentures...................................... -- -- 77
------- ------- ------
Net earnings (loss) for use in per share
calculations.................................... $(9,662) $(5,626) $2,672
======= ======= ======
When the Company is profitable, the only difference between the denominator
for basic and diluted net earnings per share is the effect of common stock
equivalents. In years of a loss, the denominator does not change because it
would be anti-dilutive.
(F) AMORTIZATION OF OTHER ASSETS
The other assets described in Note 4 are amortized using the straight-line
method over the following estimated useful lives:
Acquired software technology................................ 3 to 5 years
Covenants not to compete.................................... 3 to 5 years
Goodwill.................................................... 7 to 10 years
Other assets have generally resulted from business combinations accounted
for as purchases and are recorded at the lower of unamortized cost or fair
value. The Company annually reviews the carrying amounts of these assets for
indications of impairment, based on expected undiscounted cash flows related to
the acquired entities or products. Impairment of value, if any, is recognized in
the period it is determined.
(G) REVENUE RECOGNITION
The Company recognizes revenues from licenses of computer software provided
that a noncancelable license agreement has been signed, the software and related
documentation have been shipped, there are no material uncertainties regarding
customer acceptance, collection of the resulting receivable is deemed
F-7
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
probable, and no significant other vendor obligations exist. The revenue
associated with any license agreements containing cancellation or refund
provisions is deferred until such provisions lapse. Where the Company has future
obligations, if such obligations are insignificant, related costs are accrued
immediately. When the obligations are significant, the software product license
revenues are deferred. Future contractual obligations can include software
customization, requirements to provide additional products in the future and
porting products to new platforms. Contracts which require significant software
customization are accounted for on the percentage-of-completion basis. Revenues
related to significant obligations to provide future products or to port
existing products are deferred until the new products or ports are completed.
Service revenues generated from professional consulting and training
services are recognized as the services are performed. Maintenance revenues,
including revenues bundled with original software product license revenues, are
deferred and recognized over the related contract period, generally 12 months.
The Company's revenue recognition policies are designed to comply with American
Institute of Certified Public Accountants Statement of Position 97-2, "Software
Revenue Recognition" (SOP 97-2).
(H) COMPUTER SOFTWARE COSTS
The Company capitalizes computer software product development costs incurred
in developing a product once technological feasibility has been established and
until the product is available for general release to customers. Technological
feasibility is established when the Company either (i) completes a detail
program design that encompasses product function, feature and technical
requirements and is ready for coding and confirms that the product design is
complete, that the necessary skills, hardware and software technology are
available to produce the product, that the completeness of the detail program
design is consistent with the product design by documenting and tracing the
detail program design to the product specifications, and that the detail program
design has been reviewed for high-risk development issues and any related
uncertainties have been resolved through coding and testing or (ii) completes a
product design and working model of the software product, and the completeness
of the working model and its consistency with the product design have been
confirmed by testing. The Company evaluates realizability of the capitalized
amounts based on expected revenues from the product over the remaining product
life. Where future revenue streams are not expected to cover remaining amounts
to be amortized, the Company either accelerates amortization or expenses
remaining capitalized amounts. Amortization of such costs is computed as the
greater of (1) the ratio of current revenues to expected revenues from the
related product sales or (2) a straight-line basis over the expected economic
life of the product (not to exceed five years). As of June 30, 2000 and 1999,
capitalized computer software costs approximated $80,840,000 and $69,698,000
respectively, and related accumulated amortization totaled $48,203,000 and
$42,437,000, respectively. Software costs related to the development of new
products incurred prior to establishing technological feasibility or after
general release are expensed as incurred.
(I) INCOME TAXES
In accordance with Statement of Financial Accounting Standards No. 109,
"ACCOUNTING FOR INCOME TAXES" ("Statement 109"), the Company utilizes the asset
and liability method of accounting for income taxes. Under the asset and
liability method of Statement 109, deferred tax assets and liabilities are
established to recognize the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases.
F-8
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
(J) FOREIGN OPERATIONS AND CURRENCY TRANSLATION
The local currencies of the Company's foreign subsidiaries are the
functional currencies. Assets and liabilities of foreign subsidiaries are
translated into U.S. dollars at current exchange rates, and the resulting
translation gains and losses are included as an adjustment to shareholders'
equity. Transaction gains and losses relate to U.S. dollar denominated
intercompany receivables recorded in the financial statements of the Company's
foreign subsidiaries and are reflected in income. Where related intercompany
balances have been designated as long-term, gains and losses are included as an
adjustment to shareholders' equity. Net gains and losses arising from foreign
currency transactions for all periods have not been significant.
(K) RECLASSIFICATIONS
Certain 1999 and 1998 amounts have been reclassified to conform with the
2000 financial statement presentation.
(L) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from these estimates.
(M) ADVERTISING COSTS
The Company generally expenses advertising costs as incurred. Advertising
costs for the fiscal years ended June 30, 2000, 1999 and 1998 were $1,517,042,
$2,360,682 and $1,819,535, respectively.
(N) COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income" as of July 1, 1998. SFAS 130 requires
disclosure of total non-shareholder changes in equity in interim periods and
additional disclosures of the components of shareholder changes on an annual
basis. Total non-shareholder changes in equity include all changes in equity
during a period except those resulting from investments by and distributions to
shareholders. The Company has restated information for all prior periods
reported below to conform to this standard (in thousands):
FOR THE YEAR ENDED JUNE 30,
------------------------------
2000 1999 1998
-------- -------- --------
Net earnings (loss)............................... $(9,662) $(5,626) $2,595
Foreign currency translation adjustments.......... (225) (507) 208
------- ------- ------
Total Comprehensive income (loss)................. $(9,887) $(6,133) $2,803
======= ======= ======
(O) SEGMENT INFORMATION
The Company has adopted the Financial Accounting Standards Board's statement
of Financial Accounting Standards No. 131, or SFAS 131, "Disclosures about
Segments of an Enterprise and Related
F-9
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Information," effective for fiscal years beginning after December 15, 1997.
SFAS 131 supersedes Statement of Financial Accounting standards No. 14, or
SFAS 14, Financial Reporting for Segments of a Business Enterprise. SFAS 131
changes current practice under SFAS 14 by establishing a new framework on which
to base segment reporting and also requires interim reporting of segment
information.
The Company markets its products and related services primarily in North
America, Europe and Asia and primarily measures its business performance based
upon geographic results of operations. Selected balance sheet and income
statement information pertaining to the various significant geographic areas of
operation are as follows:
As of and for the year ended June 30, 2000:
NET INCOME DEPRECIATION CAPITAL
GROSS ASSETS REVENUE (LOSS) AND AMORTIZATION EXPENDITURES
------------ -------- ---------- ---------------- ------------
Belgium............................ $ 416 $ 1,138 $ (620) $ 42 $ 13
Netherlands........................ 658 2,963 (74) 68 29
France............................. 2,261 3,782 (3,107) 63 8
Germany............................ 360 1,626 179 2 0
Spain.............................. 4,185 5,411 (582) 177 45
United Kingdom..................... 4,809 7,968 (785) 177 58
North America...................... 51,606 57,116 (4,673) 1,743 155
------- ------- ------- ------ ----
Total.............................. $64,295 $80,004 $(9,662) $2,272 $308
======= ======= ======= ====== ====
As of and for the fiscal year ended June 30, 1999:
NET INCOME DEPRECIATION CAPITAL
GROSS ASSETS REVENUE (LOSS) AND AMORTIZATION EXPENDITURES
------------ -------- ---------- ---------------- ------------
Belgium........................... $ 720 $ 1,400 $(1,873) $ 63 $ 28
Netherlands....................... 1,553 4,409 (480) 76 44
France............................ 4,691 6,616 (3,709) 73 47
Germany........................... 281 1,533 (68) 6 0
Spain............................. 5,028 6,615 (4,226) 492 727
United Kingdom.................... 4,505 9,355 (1,098) 232 155
North America..................... 66,407 71,863 5,828 1,584 812
------- -------- ------- ------ ------
Total............................. $83,185 $101,791 $(5,626) $2,526 $1,813
======= ======== ======= ====== ======
F-10
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
As of and for the year ended June 30, 1998:
NET INCOME DEPRECIATION CAPITAL
GROSS ASSETS REVENUE (LOSS) AND AMORTIZATION EXPENDITURES
------------ -------- ---------- ---------------- ------------
Belgium............................ $ 786 $ 1,947 $ (248) $ 46 $ 38
Netherlands........................ 1,284 3,649 (789) 84 77
France............................. 3,429 3,127 (2,447) 21 51
Germany............................ 508 1,952 376 9 14
Spain.............................. 5,035 5,858 (515) 356 329
United Kingdom..................... 3,406 7,111 (2,588) 218 164
North America...................... 63,741 68,040 8,806 2,168 569
------- ------- ------- ------ ------
Total.............................. $78,189 $91,684 $ 2,595 $2,902 $1,242
======= ======= ======= ====== ======
The Company has no customers that represent ten percent or more of annual
revenues.
(P) NEW ACCOUNTING PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES" ("Statement 133"). Statement 133 establishes accounting
and reporting standards for derivative instruments including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. Statement 133 is required to be adopted
for the Company's fiscal year 2001. The Company does not anticipate that
Statement 133 will have a significant impact on its financial statements or
financial statement disclosures.
In 1999, the staff of the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 summarizes the SEC staff's views in applying generally
accepted accounting principles to the recognition of revenues. The Company is
currently reviewing its revenue recognition policy and does not expect the
adoption of SAB No. 101 to have a material impact on its consolidated results of
operations, financial position, or cash flows.
(Q) NON-RECURRING COSTS
During the third quarter of fiscal year 2000, the Company recorded a
$1,145,000 expense to cover the liability arising from separation costs
associated with 19 employees employed in sales, marketing, services, and product
development in North America and Europe. The costs were accrued in accordance
with EITF Issue 94-3. At June 30, 2000, $589,000 of the liability remained and
will be paid in fiscal 2001.
(2) ACQUISITIONS AND DIVESTITURES
On August 26, 1998, the Company acquired a 100% ownership interest in
HiPoint Systems Corporation ("HiPoint"), a privately held computer consulting
firm based in Ontario, Canada, in exchange for shares of the Company's Common
Stock valued at approximately $1,547,000. HiPoint had been a consulting partner
on many of the Company's software implementation and consulting projects over
the past several years. The acquisition has been accounted for as a purchase
and, accordingly, the results of operations of the acquired business have been
included in the Company's results of operations from the
F-11
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) ACQUISITIONS AND DIVESTITURES (CONTINUED)
date of acquisition. The pro forma effects on total revenues, net earnings
(loss), and net earnings (loss) per share of including this subsidiary in the
Company's Consolidated Statement of Operations from the beginning of fiscal 1999
and 1998 are not significant to the Company as a whole.
On January 6, 1998, the Company acquired the assets of its business partner,
Bizware Corporation, in exchange for shares of the Company's common stock valued
at approximately $2.0 million. The acquisition was accounted for as a purchase,
and accordingly, the results of operations of the acquired business have been
included in the Company's results of operations since the date of acquisition.
The pro forma effects on total revenues, net earnings, and net earnings per
share of including this subsidiary in the Company's consolidated statement of
operations are not significant.
On December 30, 1996, the Company acquired a 100% ownership interest in Ross
Iberica, its distributor in Spain and Portugal for the past five years, in
exchange for shares of the Company's common stock valued at approximately
$1,400,000. The acquisition was accounted for as a purchase, and accordingly,
the results of operations of the acquired business have been included in the
Company's results of operations since the date of acquisition. The pro forma
effects on total revenues, net earnings, and net earnings per share of including
this subsidiary in the Company's consolidated statement of operations are not
significant.
(3) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
JUNE 30,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
Computer equipment...................................... $ 13,113 $ 14,209
Furniture and fixtures.................................. 3,007 3,025
Leasehold improvements.................................. 1,705 1,819
-------- --------
17,825 19,053
-------- --------
Less accumulated depreciation and amortization.......... (14,816) (13,881)
-------- --------
$ 3,009 $ 5,172
======== ========
F-12
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) OTHER ASSETS
A summary of other assets follows:
JUNE 30,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
Covenants not to compete.................................. $ 1,285 $ 1,285
Goodwill.................................................. 7,479 7,479
Other..................................................... 2,153 2,153
------- -------
10,917 10,917
Less accumulated amortization............................. (7,706) (6,643)
------- -------
$ 3,211 $ 4,274
======= =======
(5) ACCRUED EXPENSES
A summary of accrued expenses follows:
JUNE 30,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
Accrued vacation and other employee benefits................ $ 812 $1,120
Accrued commissions......................................... 927 2,125
Deferred rent............................................... 33 120
Sales and use taxes payable................................. 556 1,807
Interest payable............................................ 84 100
Professional fees........................................... 112 101
Royalties................................................... 647 696
Other....................................................... 2,288 2,674
------ ------
$5,459 $8,743
====== ======
During fiscal 1997, the Company settled a dispute with a customer with the
understanding that the settlement and related legal fees would be covered under
the Company's business insurance. The Company subsequently learned that the
insurer took exception to the Company's settlement with its customer and
withheld payment on the claim, pending arbitration. In fiscal 1997, the Company
recorded a charge of $615,000 to cover the potential settlement and legal fees.
During fiscal 1998, the Company received a reimbursement from the insurance
Company of $381,000 which it recorded as a credit to operating expenses.
(6) DEBT
The Company has a revolving credit facility for up to $15,000,000 which is
collateralized by substantially all assets of the Company. The revolving credit
facility expires on October 31, 2000, but has been extended until December 31,
2000. The credit facility carries an interest rate at the prime rate plus 2%
(11.50% at June 30, 2000), and restricts the Company's ability to enter into any
acquisition or merger not in the Company's regular line of business and to pay
any cash dividends on the Company's stock. The revolving credit facility may be
withdrawn if (a) the Company fails to pay any principal or interest amount
F-13
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) DEBT (CONTINUED)
due or (b) there is a material impairment of the Company's business which would
prevent loan repayment and (c) any of these events are not remedied by the
Company within allowable periods. At June 30, 2000 and 1999, $8,747,000 and
$11,981,000 were outstanding under the Company's revolving credit facility,
respectively. As of June 30, 2000 the amounts available under the revolving
credit facility totaled $601,000.
Long term debt consists of convertible debentures. (See note 8.)
As of June 30, 2000 and 1999, the Company had outstanding capital lease
obligations aggregating $870,000 and $267,000, respectively. As of June 30, the
Company's future obligations under capital leases are as follows (in thousands):
2000 1999
-------- --------
Fiscal Year:
2001........................................................ $689 $205
2002........................................................ 307 132
---- ----
Total future capital lease payments......................... 996 337
Less amounts representing interest.......................... 126 70
---- ----
$870 $267
==== ====
(7) COMMITMENTS AND CONTINGENCIES
The Company leases facilities and certain equipment under operating leases
which expire at various dates through fiscal 2016. Certain leases include
renewal options and rental escalation clauses to reflect changes in price
indices, real estate taxes, and maintenance costs. As of June 30, 2000, future
minimum lease payments under noncancelable operating leases were as follows (in
thousands):
FISCAL YEAR
- -----------
2001........................................................ $2,693
2002........................................................ 1,773
2003........................................................ 285
2004........................................................ 176
Thereafter.................................................. 235
------
Total future minimum lease payments......................... $5,162
======
The Company has an irrevocable letter of credit outstanding in the amount of
$670,000 which was issued in exchange for a waiver of an event of default under
an operating lease covenant in 1997. Rent expense approximated $3,612,000
$3,829,000, and $3,510,000, for fiscal 2000, 1999, and 1998, respectively.
(8) CAPITAL STOCK
(A) MANDITORILY REDEEMABLE PREFERRED STOCK
In fiscal 1991, the Company authorized a new class of no par value preferred
stock consisting of 5,000,000 shares. The Board of Directors is authorized to
issue the preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions of such stock, including dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation
F-14
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) CAPITAL STOCK (CONTINUED)
preferences and the number of shares constituting any series or the designation
of such series, without further vote or action by the shareholders. All
preferred stock was issued with a mandatory redemption factor. As of June 30,
1999 and 1998, the Company had no shares of its Manditorily redeemable
convertible preferred stock outstanding.
(B) PRIVATE EQUITY FINANCING AND WARRANTS
During fiscal 1996, the Company completed two private placements of equity
securities. On January 2, 1996, the Company received approximately $1,820,000 in
cash proceeds, net of offering expenses, for the issuance of 500,000 shares of
the Company's Series A Manditorily redeemable convertible preferred stock. In
addition, on February 28, 1996, the Company received approximately $4,575,000 in
cash proceeds, net of offering expenses, for the issuance of 500 shares of the
Company's Series D Manditorily redeemable convertible preferred stock.
During fiscal 1997, the Company completed two additional private placements
of equity securities with the same investor who had purchased and converted the
Company's Series A Manditorily redeemable convertible preferred stock. On
July 8, 1996, the Company received approximately $3,737,000 in cash proceeds,
net of offering expenses, for the issuance of 500,000 shares of the Company's
Series B Manditorily redeemable convertible preferred stock and 500,000 shares
of the Company's Series C Manditorily redeemable convertible preferred stock.
Additionally, on January 6, 1997, the Company received approximately $1,983,000
in cash proceeds, net of offering expenses, for the issuance of 200 shares of
the Company's Series E Manditorily redeemable convertible preferred stock. All
of the Series A, B, C, D and 93 shares of the Series E Manditorily redeemable
convertible preferred stock were converted to common stock by June 30, 1997.
Therefore, as of June 30, 1997, 107 shares of the Company's Series E Redeemable
Manditorily redeemable convertible preferred stock remained outstanding. These
remaining shares were converted in April 1998, and the Company issued 286,633
shares of common stock.
In connection with the issuance of the Company's Series A Manditorily
redeemable convertible preferred stock and the subsequent issuance's of the
Company's Series B and Series C Manditorily redeemable convertible preferred
stock, the Company granted a warrant to the investor to purchase 400,000 shares
of the Company's Common Stock at an exercise price of $5.576 per share during
the period from and including July, 1, 1997 through and including December 29,
2000. Additionally, in connection with the subsequent issuance of the Company's
Series E Manditorily redeemable convertible preferred stock, the Company granted
another warrant to the investor to purchase 640,000 shares of the Company's
Common Stock at a maximum exercise price of $8.00 per share during the period
from and including July, 1, 1997 through and including December 29, 2000.
On April 23, 1998, the Company issued and sold 353,000 shares of its Common
Stock to this investor upon the exercise of the warrant to purchase 640,000
shares of the Company's Common Stock mentioned above. The Company and the
investor also agreed to cancel the remaining 287,000 shares of Common Stock
subject to the warrant. The aggregate exercise price paid by this investor was
$1,141,946, representing a per share exercise price of $3.234975. The Company
and the investor agreed to reduce the exercise price from that set forth in the
warrant certificate, dated July 3, 1996, representing the warrant in
consideration for the cancellation.
F-15
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) CAPITAL STOCK (CONTINUED)
(C) CONVERTIBLE DEBENTURES
On February 6, 1998, the Company closed a private placement of up to
$10,000,000 of convertible subordinated debentures to certain institutional
investors (the "Investors") pursuant to Regulation D promulgated under the
Securities Act of 1933, as amended. The investors invested $6,000,000 on
February 6, 1998 and $4,000,000 on June 11, 1998. As of June 30, 2000, the
remaining balance after conversions and redemption's is $1,933,333. The material
agreements between the Company and each Investor have been filed as exhibits to
the Current Report on Form 8-K filed with the Securities and Exchange Commission
by the Company on February 12, 1998. The salient points of the convertible
subordinated debenture agreement are as follows:
INTEREST: The interest rate is four percent per annum for the first six
months after the original issuance date of the convertible debenture and six
percent per annum thereafter, subject to increases (up to the legal maximum
rate) if the Company is in default under the convertible debenture. Accrued
interest is due and payable in shares of the Company's Common Stock
semi-annually on the last day of June and December of each year. The value for
such shares of Common Stock is the average of the two lowest closing bid prices
for the Company's Common Stock as reported by the Bloomberg Service for the
thirty trading days immediately before the interest payment date.
CONVERSION PRICE: The conversion price for the convertible debentures is
(P+I) divided by the Conversion Date Market Price where P equals the outstanding
principal amount of the convertible debenture submitted for conversion, I equals
accrued but unpaid interest as of the conversion date and Conversion Date Market
Price equals the lesser of the maximum conversion price (as defined below) or
101% of the average of the two lowest closing bid prices for the Company's
Common Stock as reported by the Bloomberg Service for the thirty trading days
immediately before the conversion date. The maximum conversion price is
(i) until December 31, 1998, $7.00 subject to a downward adjustment if the
Company issues shares in a private placement financing transaction at a per
share price less than $7.00 and (ii) commencing January 1, 1999, 115% of the
average closing bid price of the Common Stock as reported by the Bloomberg
Service over the 1998 calendar year. A portion of the convertible debentures
issued in June 1998 (the "Second Closing Debentures") were redeemed by the
Company.
During fiscal 2000 and fiscal 1999, through the issuance of additional
common shares, the Company paid interest in kind of $149,000 and $270,354,
respectively, related to these debentures. When the Company is profitable, this
payment in kind interest is added back to net earnings in the determination of
diluted earnings per share. In years of loss, this amount in not added back as
it would be anti-dilutive. (See note 1.)
(D) REINCORPORATION
In June, 1998, the Company effected a change in its legal domicile from
California to Delaware by creating a Delaware corporation which was the
surviving entity of a merger with the California corporation. With this
reincorporation, the shares of the Delaware corporation have a stated par value
of $0.001 per share.
F-16
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) EMPLOYEE STOCK PLANS
At June 30, 2000, the Company had three stock-based compensation plans,
which are described below. The Company applies Accounting Principles Board
opinion no. 25 and related Interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized for its Stock Option Plan
and its Stock Purchase Plan. Had compensation cost for the Company's Stock
Option and Stock Purchase Plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of Statement
123, the Company's net earnings (loss) and net earnings (loss) per share would
have been the pro forma amounts indicated below (in thousands, except per share
data):
YEAR ENDED JUNE 30,
------------------------------
2000 1999 1998
-------- -------- --------
Net earnings (loss):
As reported.................................... $ (9,662) $(5,626) $2,595
Pro forma...................................... (10,657) (7,087) 951
Net earnings (loss) per share:
As reported basic.............................. $ (0.41) $ (0.25) $ 0.13
As reported diluted............................ (0.41) (0.25) 0.13
Pro forma basic................................ (0.46) (0.32) 0.08
Pro forma diluted.............................. (0.46) (0.32) 0.08
For purposes of computing the pro forma amounts above, the Black-Scholes
option pricing model was used. The assumptions used in this model are disclosed
for the individual plans below.
(A) STOCK OPTION PLAN
The Company has reserved 2,100,000 shares of common stock for issuance under
its 1988 Incentive Stock Plan (the "Plan") and 1,900,000 shares of common stock
for issuance under its 1998 Incentive Stock Plan. Under the Plan, the Company
may issue options to purchase shares of the Company's common stock to eligible
employees, officers, directors, independent contractors and consultants. The
term of the options issued under the Plan cannot exceed ten years from the date
of grant. Options granted to date generally become exercisable over four to five
years based on the grantees' continued service with the Company.
On September 18, 1998 the Board of Directors of the Company approved an
adjustment to the exercise price for certain outstanding stock options held by
all current employees, which have an exercise price of $3.00 and above. In
consideration for this repricing offer, officers of the Company participating in
the option repricing were required to forfeit 10% of the shares subject to each
option being repriced, while non-officer employees participating in the option
repricing are subject to a one year limitation on the exercisability of repriced
options subject to certain exceptions. The revised exercise price was
established by reference to the closing price of the Company's Common Stock on
September 28, 1998, which was approximately $2.59. Approximately 90 employees
participated in the repricing with approximately 1,336,000 options being
repriced. Of the stock options repriced, options to purchase approximately
831,000 shares were held by executive officers of the Company.
F-17
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) EMPLOYEE STOCK PLANS (CONTINUED)
A summary of the status of the Company's Plan as of June 30, 2000, 1999 and
1998 and activity for the fiscal years then ended is presented below:
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE EXERCISABLE
---------- ---------------- -----------
Balance as of June 30, 1997............................ 1,550,000 $ 4.88 620,000
Granted (at fair value)................................ 728,000 $ 4.46
Exercised.............................................. (78,000) $ 3.59
Canceled............................................... (312,000) $ 5.02
----------
Balance as of June 30, 1998............................ 1,888,000 $ 4.76 749,000
Granted (at fair value)................................ 1,731,000 $ 2.79
Exercised.............................................. (25,000) $ 2.59
Canceled............................................... (1,808,000) $ 4.66
----------
Balance as of June 30, 1999............................ 1,786,000 $ 2.97 860,000
Granted (at fair value)................................ 611,000 $ 2.58
Exercised.............................................. (10,000) $ 2.59
Canceled............................................... (351,000) $ 2.88
----------
Balance as of June 30, 2000............................ 2,036,000 $ 2.87 1,028,000
==========
The weighted average estimated grant date fair value of options granted
during fiscal 2000, 1999 and 1998 was $2.58, $2.79 and $3.76, respectively. At
June 30, 2000, 1,028,000 shares were exercisable.
The following table summarizes information about the stock options
outstanding at June 30, 2000:
OPTIONS OUTSTANDING
------------------------------
WEIGHTED AVERAGE OPTIONS EXERCISABLE
REMAINING ------------------------------
SHARES CONTRACTUAL WEIGHTED AVERAGE SHARES WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------------------ ----------- ---------------- ---------------- ----------- ----------------
$1.88 -- $2.44...... 238,000 9.3 years $2.07 23,000 2.24
$2.50 -- $2.50...... 140,000 9.4 years 2.50 0 0
$2.59 -- $2.59...... 999,000 6.3 years 2.59 757,000 2.59
$2.66 -- $2.81...... 238,000 8.1 years 2.75 75,000 2.80
$3.18 -- $3.81...... 230,000 8.4 years 3.41 46,000 3.66
$3.88 -- $5.25...... 121,000 6.4 years 4.37 71,000 4.39
$5.50 -- $5.50...... 10,000 6.1 years 5.50 8,000 5.50
$6.50 -- $6.50...... 37,000 6.4 years 6.50 29,000 6.50
$6.75 -- $6.75...... 23,000 6.0 years 6.75 19,000 6.75
Totals.............. 2,036,000 7.3 years $2.87 1,028,000 $2.98
--------- -------------- ----------- --------- -----
F-18
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) EMPLOYEE STOCK PLANS (CONTINUED)
The following weighted average assumptions for the Company's Stock Option
Plan were used to determine the pro forma amounts noted above:
YEAR ENDED
JUNE 30,
-------------------
2000 1999
-------- --------
Expected volatility......................................... 104.7% 79.9%
Risk-free interest rate..................................... 6.5% 5.8%
Expected dividend yield..................................... * *
- ------------------------
* Not applicable
(B) EMPLOYEE STOCK PURCHASE PLAN
The Company initially reserved 800,000 shares of common stock for issuance
under its 1991 Employee Stock Purchase Plan ("ESPP"). In fiscal 1999, the
stockholders approved an amendment to the plan whereby the number of shares
reserved for issuance was increased to 950,000. The amendment also provides that
beginning in fiscal 2000 and each year thereafter, the amount reserved for
issuance is increased by the lesser of 150,000 shares or 1% of total outstanding
common stock.
Under the ESPP, the Company's employees may purchase, through payroll
deductions of 1% to 10% of compensation, shares of common stock at a price per
share that is the lesser of 85% of its fair market value as of the beginning or
end of the offering period. Under the ESPP, the Company sold 139,552 shares,
121,861 shares and 116,000 shares to employees in fiscal 2000, 1999 and 1998,
respectively. The weighted average fair value of those purchase rights granted
in fiscal 2000 and 1999 was $1.45 and $1.64, respectively. As of June 30, 2000,
877,000 shares had been issued under the ESPP.
The following weighted average assumptions for the Company's ESPP were used
to determine the pro forma amounts noted above:
YEAR ENDED JUNE 30,
---------------------
2000 1999
--------- ---------
Expected life........................................... 0.5 years 0.5 years
Expected volatility..................................... 104.7% 74.7%
Risk-free interest rate................................. 6.5% 5.6%
Expected dividend yield................................. * *
- ------------------------
* Not applicable
(C) OTHER EMPLOYEE PLAN
In June 1992, the Company reserved 200,000 shares of common stock for
issuance to certain employees as payment under compensation agreements. As of
June 30, 2000, 10,000 shares had been issued under the plan.
F-19
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) INCOME TAXES
Earnings (losses) before income taxes include foreign losses before income
taxes of approximately $(4,640,000), $11,450,000, and $6,200,000 for fiscal
2000, 1999 and 1998, respectively. During fiscal 1999, the Company forgave
approximately $6,702,000 in intercompany debt, but elected to treat the
forgiveness as an infusion of capital at the subsidiary level.
Income tax expense (benefit) for the years ended June 30, 2000, 1999 and
1998 consists of the following (in thousands):
2000 1999 1998
-------- -------- --------
Current:
Federal............................................... $ -- $(325) $ --
Foreign............................................... 349 473 337
State................................................. -- 173 45
---- ----- ----
349 321 382
---- ----- ----
Deferred:
Federal............................................... -- -- --
Foreign............................................... -- -- --
State................................................. -- -- --
---- ----- ----
-- -- --
---- ----- ----
$349 $ 321 $382
==== ===== ====
For the years ended June 30, 2000, 1999 and 1998, the reconciliation between
the amounts computed by applying the United States federal statutory tax rate of
34% to earnings (loss) before income taxes and the actual tax expense follows
(in thousands):
2000 1999 1998
-------- -------- --------
Income tax (benefit) expense at statutory rate.... (3,166) (1,804) 1,012
State income tax (benefit) expense, net of federal
income tax benefit.............................. (422) (159) 46
Change in beginning of year valuation allowance... 1,526 (215) (1,604)
Losses for which no benefit is recognized......... 1,630 2,190 395
Rate differential related to foreign income and
foreign tax withholdings........................ 349 473 339
Amortization of other assets and other permanent
differences..................................... 432 326 209
Federal income tax benefit from net operating loss
carryback....................................... -- (414) --
------- ------- -------
Other............................................. -- (76) (15)
------- ------- -------
$ 349 $ 321 $ 382
======= ======= =======
F-20
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at June 30, 2000
and 1999 were as follows (in thousands):
2000 1999
-------- --------
Accruals and reserves................................... $ 997 $ 868
Net operating loss carryforward (federal)............... 12,241 10,728
Net operating loss carryforward (state)................. 2,012 887
Net operating loss carryforward (foreign)............... 3,834 3,264
Foreign tax and research credit carryforwards........... 3,802 3,453
-------- --------
Total gross deferred tax assets....................... 22,886 19,200
Less valuation allowance.............................. (9,802) (8,276)
-------- --------
Net deferred tax assets............................... 13,084 10,924
-------- --------
Capitalized computer software costs..................... (12,969) (10,649)
Undistributed earnings of subsidiary.................... 196 (234)
Fixed assets depreciation differences................... (311) (41)
-------- --------
Total gross deferred liabilities...................... (13,084) (10,924)
-------- --------
Net deferred taxes...................................... $ -- $ --
======== ========
The net change in total valuation allowance for the year ended June 30, 2000
was an increase of $1,526,000. The valuation allowance has been established to
recognize the uncertainty of utilizing loss and credit carryovers and certain
deferred assets.
At June 30, 2000, the Company had net operating loss carryforwards of
approximately $36,003,000, $13,320,000 and $11,275,000 for federal, California
and foreign tax purposes, respectively. At June 30, 2000, the Company also had
unused research and other credit carryforwards of approximately $3,248,000 and
$554,000 for federal and California tax purposes, respectively. The loss and
research credit carryforwards, if not utilized, will expire between fiscal 2000
and 2014.
(11) EXTRAORDINARY ITEMS
During October 1998, the Company redeemed $2,667,000 aggregate principle
amount of the then outstanding Second Closing Debentures. In accordance with the
redemption option of the convertible subordinated debenture agreement outlined
above, the Company incurred a one time extraordinary charge of approximately
$213,000, or 8% of the aggregate principle amount of the Second Closing
Debentures redeemed.
F-21
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the years ended June 30, 2000, 1999
and 1998 follows (in thousands):
2000 1999 1998
-------- -------- --------
Cash payments:
Interest.......................................... $1,327 $1,289 $1,321
Income taxes...................................... $ 245 $ 686 $ 187
Noncash investing and financing activities:
Conversion of preferred stock..................... -- -- $1,053
Product purchased in exchange for distribution
agreement....................................... -- -- --
Acquisition of equipment under capital lease
obligations..................................... -- -- $ 479
Conversion of convertible debentures into stock
(non-cash transaction).......................... $1,249 $2,761 $1,539
Issuance of stock in settlement of litigation..... -- -- --
Issuance of stock for product/business
acquisitions.................................... $2,067 $2,057
Acquisition of distributor's customer base........ -- -- --
In June 1997, the Company entered into a license agreement with a
distributor whereby the distributor received a license, valued at $1.3 million,
to distribute the Company's Renaissance CS product. The Company recognized this
revenue in June 1997. Simultaneously, the Company received certain software
products and components from this distributor in exchange for the aforementioned
license agreement. The value of the license agreement was ascribed to the assets
received in this nonmonetary transaction. These assets are included in
capitalized software costs and are being amortized over four years.
(13) SUBSEQUENT EVENT
On September 12, 2000, the Company announced a strategic restructuring aimed
at reducing costs and improving efficiencies. Under the restructuring, the
Company reduced 125 positions across the company as well as accelerated efforts
to eliminate unneeded office space, improve productivity through the use of
technology and focus on increased revenues through the use of distributors.
F-22
SCHEDULE II
ROSS SYSTEMS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
ADDITIONS
----------------------
BALANCE AT CHARGED TO CHARGED
BEGINNING COSTS AND TO OTHER BALANCE AT
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS(1) END OF PERIOD
- ----------- ---------- ---------- --------- ------------- -------------
Year ended June 30, 2000 allowance
for doubtful accounts and
returns........................... $2,884 $4,645 $ -- $3,958 $3,571
------ ------ ------ ------ ------
Year ended June 30, 1999 allowance
for doubtful accounts and
returns........................... $1,974 $2,421 $ -- $1,511 $2,884
------ ------ ------ ------ ------
Year ended June 30, 1998 allowance
for doubtful accounts and
returns........................... $3,495 $1,830 $ -- $3,351 $1,974
------ ------ ------ ------ ------
- ------------------------
(1) Represents net charge-offs of specific receivables.
S-1